Lesaka Technologies, Inc. (LSAK) Q2 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Net 1 Second Quarter 2018 Results Conference. All participants are currently in listen-only mode. And there will be an opportunity for you to ask questions later during the conference. [Operator Instructions] Please also note that this call is being recorded. I would now like to turn the conference over to Dhruv Chopra. Please go ahead.

Thank you, Chris. Welcome everyone to our second quarter fiscal 2018 earnings call. With me on the call today is our CEO, Herman Kotze. Our press release, Form 10-Q and supplementary financial presentation are available on our Investor Relations website, ir.net1.com. As a reminder, during this call, we will be making certain forward-looking statements and I ask you to look at the cautionary language contained in our press release and Form 10-Q regarding the risks and uncertainties associated with forward-looking statements. In addition, during this call, we will be using certain non-GAAP financial measures and we have provided a reconciliation of these non-GAAP measures to the most directly comparable GAAP measures. We will discuss our results in South African rand, which is a non-GAAP measure. We analyze our results of operations in our 10-Q and our press release in rands 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 Herman, let me remind you that while we will have a question and answer section following our prepared remarks, given the current sensitivities, we will not be taking any questions about SASSA or CPS. With that, let me turn the call over to Herman.

Thank you, Dhruv. Good morning to all of our shareholders. We have continued to press forward over the past quarter and we have observed a number of exciting developments as a result of our actions. The establishment of a blockchain department at Bank Frick accelerates our ability to reposition our core UEPS solution at the forefront of offline and biometric blockchain technology. Meanwhile, our core financial inclusion initiatives in South Africa are starting to bear fruit with an acceleration of our EPE offering in late 2017 and early 2018. We have additionally begun to realize certain synergies with Cell C and DNI, and our new mobile banking product is in beta testing. We have achieved all of this despite considerable time and effort spent on restructuring of the group and closure of certain business lines, while of course addressing some of the challenges in South Africa. As we get closer to the March 31, 2018 SASSA contract expiration, we expect that the frenetic pace of activity, news coverage and opinions from all and sundry will only intensify. We will as always lend our support to the most vulnerable citizens of South Africa and government while protecting the interest of the company of 5,500 employees and its shareholders. We are proud of our track record of having delivered the right grant to the right person on time for the past 71 months and having saved the government more than ZAR 10 billion over the contract period which is more than the fees paid to us. For Q2, 2018, we reported revenue of $148 million, which was down 2% in dollars and 4% in South African rand. While we had positive contributions from our South African transaction processing businesses including EasyPay and ATMs as well as financial services and non-Korean international businesses, these gains were more than offset by lower ad hoc hardware sales, fewer prepaid airtime sales and regulatory changes in Korea. We also reported $0.59 in fundamental earnings per share, which was adversely impacted by a higher share count, inflationary increases in costs and a higher tax rate. In my view, our financial performance over the last few quarters has been average as a result of a number events, including some exogenous ones and do not currently reflect the true potential of what we are capable of delivering and what energizes managements, given the actions on multiple fronts that we have taken over the past six to eight months. To summarize some of the corporate restructuring actions taken over the past quarter, we sold XeoHealth in the U.S. effective November 1, 2017. Additionally, we have decided to exit with the traditional working capital finance business of Masterpayments, for non-payment solution customers and as a result took an allowance for doubtful accounts of $7.8 million related to its U.S. book and sold the remaining [$36] [ph] million European book to Bank Frick in January 2018 after a detailed due diligence process. Last week, we had incorporated our new JV focused on international UEPS/EMV opportunities in January 2018 and this entity will now start gearing up operationally in Q3. Next I will discuss the developments in our South African businesses. First, on our EPE initiative, during Q2, we rolled out 500 additional portable enrolment workstations along with our roving salesforce. By the end of the quarter and early in Q3, we have begun to see a reacceleration in EPE account growth. Growth previously had slowed as a result of the saturation of our physical and immovable branch infrastructure. Commensurate with the demand for our low cost bank accounts, we also observed the meaningful increase in our loan book during Q2. While rapid growth in our loan book pressures near term profitability as a result of our policy to provide for the loan and its initiation, which cost us $1.4 million in pre tax or $0.02 a share in Q2, the corresponding revenue associated with these loans will become more evident during Q3. SmartLife also continued to grow during Q2, despite it being a seasonally slower quarter for this business. One additional point on SmartLife if you recall, once the suspension of license was lifted a couple of years ago, the FSB which is the regulatory authority required us to have a court appointed statutory manager to oversee our business. I am pleased to note that the FSB is satisfied with the way we operate and no longer deems it necessary to have a statutory manager in place. Our prepaid airtime and electricity business which has been adversely affected by the introduction of our biometric linking security features appears to have bottomed out and revenue during Q2, 2018 was flat sequentially compared to Q1, 2018. Second, I will address our C and DNI. As I mentioned previously, our South African businesses, infrastructure technology products and distribution fits directly into our recent investment in Cell C and DNI, which closed in early August 2017. This transaction allows all of us make one Cell C and DNI to leverage common denominators of our businesses mainly overlapping customer characteristics as well as the pervasive adoption of mobile telephony to offer bespoke and disruptive products to the market. In a short period of time, we have made good progress towards the realization of our anticipated synergies. Cell C has now simplified our SIM card mask [ph] and we are ready to commence delivery of our first batch of SIM cards to them during Q3. Cell C also launched Black, a revolutionary product offering digital media content with flexible payment options including payment using Cell C airtime. We believe we can further expand distribution through our various channels. We will also be handling Cell C’s EFT collections for their post paid customers starting later this month. Lastly in December, we launched the pilot for our new lifestyle product and based on customer feedback we are currently treating the component of the bundled product to ensure that it provides real value and therefore demand when we roll it out on a large scale. DNI continues to trade well ahead of budget and we are extremely happy with the operational efficiency of this business and the progress made with the roll out of revolutionary new products such as the Micro-jobbing platform. Lastly within South Africa, we’ve also accelerated our corporation with Finbond where in addition to deploying our ATMs in the extensive branch infrastructure, we are enabling them to become an issuer of UEPS/EMV cards. I will now shift focus to our international business and strategy. Starting with the international payments group or IPG for short, which following our restructuring includes our various E-Money licenses, issuing, acquiring, and payment gateway businesses, and related activities around our growing involvement with Bank Frick. Let me first discuss the strategic position to discontinue the working capital finance activities of Masterpayments. While we firmly believe that working capital finance is an integral part of our IPG offering to SMEs, we have decided to accept the traditional financing business to merchants who are not payment solutions customers of IPG as this is not a core competency and it does not fit with IPG’s strategy outlined at our investor day in December. Following the decision to wind down this part of the book, we took a non-recurring allowance for doubtful finance receivable related to the U.S. portion of Masterpayments book in the amount of $7.8 million and the remaining $36 million of the European book has been sold to Bank Frick at face value, the proceeds of which were used to pay off the credit facilities received from Bank Frick to fund the book. We believe we have now addressed our exposure to the specific line of business and do not anticipate any further financial impact as a result of these actions. The only thing to note is that the revenue associated with this product will naturally disappear starting in Q3, but so will the related costs. For the first half of fiscal 2018, these businesses combined contributed approximately $4 million in revenue. For the second half of 2018, IPG segment revenue will reduce accordingly with minimal impact on segment operating income. Bank Frick is focused on enabling new financial technology products and applications and recently became the first bank in its own country to launch a certificate in crypto currencies. Our recent additional investment in Bank Frick will help to establish and accelerate the expansion of a dedicated team focused on the development and various applications of blockchain technology. In collaboration with Philip Meyer and our international transacting team, significant progress has already been made in defining new opportunities such as reciprocal expansion of the group's access to issuing and acquiring memberships of the global card schemes and associations, including Visa, MasterCard, ChinaUnionPay, WeChat Pay and Alipay, as well as the development of prepaid card technology focused on multicurrency and crypto currencies; and the provision of bank accounts and services to our expanding, acquiring and issuing client base. Within the blockchain and crypto currency space specifically the bank has been the first mover amongst the peers and there are multiple opportunities for each to provide custodian, settlement clearing and acquiring services to exchangers and for ICO. The new blockchain department at Bank Frick will work closely with our IPG team to develop and roll out various applications of blockchain technology. Let me spend a few minutes on blockchain and why we are not only equipped to be a leader in this space but also why we have the capability to address this opportunity. An important element of our strategy will be to reposition Net1 as a payments company at the leading edge of technological innovation with a specific focus on blockchain technology. From the outset it is important to note that we are focussing on the application of blockchain technology in the payment space which by its very nature implies that we need to take cognizance of crypto currencies and we require the ability to support and interact with this particular blockchain application. However, we will not own or trade any crypto currencies for our own account. It is a little known or understood fact that the UEPS technology has always been based on a former blockchain technology. Instead of using the term blockchain, we have used multiple order trail and we have always performed independent verification of transactions by always using two smartcards for UBS transaction that exchange crypto graphic [Ph] keys to validate transactions. Technically, we have always deployed our own form of a crypto currency as we use ten digit codes to tokenise monetary value. In our case, however the ten digit codes are underpinned by actual CS currency. In a way, UEPS was and still is the world’s first offline application of a distributed ledger payment system. Net 1s deep experience in offline payments biometric authentication and a highly regarded policy applications for Smartcards, point of sale devices and hardware security modules optimally positions our core UEPS solution in line with a global adoption of blockchain technology. While the rest of the world focuses on online blockchain applications using distributed networks we can position ourselves as a leader in offline blockchain payment applications and through our expertise in IPG and Bank Frick we have the ability to provide end-to-end solutions in both online and offline applications in a completely secure regulated manner. Based on discussions between Net 1, IPG and Bank Frick we have identified multiple short, medium and long term opportunities and our strategy will be formulated accordingly. Our IT experts are in the process of upgrading the UPES platform inherent ability to operate a distributed data systems, manage and issue tokens etcetera. Our close cooperation with Bank Frick which is a well anchored with a well anchored technology platform was in a fully regulated custodian environment combined with bespoke decentralized solution could provide immense exposure and revenue possibilities for the group. There are several opportunities that can be leveraged with existing assets, retail infrastructure and know how. We will provide further updates during Q3 and Q4 in terms of how we can facilitate banking payments and the provision of existing core products for the burgeoning virtual currency markets. Coming to IPG specifically a lot of difficult parts of our restructuring is complete and we now have the right management structure, strategy and operational support teams largely in place. One of the most meaningful recent wins as a result of joint efforts by the T24 Masterpayment and Bank Frick teams was to perform credit card acquiring for Bitstamp one of the largest exchangers in the world in November 2017. Bitstamp became processing in December 2017 and IPGs credit card acquiring volume more than doubled in December from November. There have subsequently been a number of additional opportunities at exchanges and ICOs that now form part of the sales backline. As cryptocurrency exchanges are currently classified as higher risk businesses, we will ensure that extensive due diligence is performed on any new plant that makes it through the pipeline. There has also been growing interest particularly from crypto exchanges to offer our T24 payable to prepaid card and there are obvious synergies between prepaid card issuing and our acquiring effects. On our last earnings call and at our December Investor Day, we spent a fair amount of time articulating our UEPS International strategy which will be executed by way of a joint venture run by Kohl Scheidler out of London. In short, the JV focus is exclusively on large scale financial inclusion opportunities in emerging economies globally. I would like to refer everyone to our Investor Day presentation for the detailed strategy and today would like to provide updates on what progress we have made since the last update in New York two months ago. Our new JV entity was incorporated late last month and now will be capitalized and starting of the entity will commence over the course of Q3. In the meantime, we have had multiple detailed strategic discussions about go-to-market strategy and target markets independently with teams of the IFC and at MasterCard. We have total pipeline of relevant and seasoned executives to employ in the group and offers will be extended as soon as we are in a position to do so. In India, our VCC pilot with MobiKwik has gone extremely well and the product is ready to be rolled out to the market at large. In December, the Central Bank in India issued new guidelines for KYC and co-branding for prepaid instruments which resulted in some changes having to be made on the compliance operations updated. Most of this work is also complete and we are awaiting final from the bank imminently. Once live, this is most likely going to be one of the largest virtual or even physical for that matter, core deployments anywhere in the world. Meanwhile we continued to make further progress on being able to introduce UEPS in India as well as on our international remittance product as we expect to receive our certification from Visa to be a certified ACH processor in India in the next 50 days. Lastly, for KSNET in Korea, the van companies continue to remain under pressure as a result of the regulatory driven pricing pressure and the elimination of certain authentication requirements for low-value transactions. Q2 was also impacted as a result of being a seasonally weak quarter including a particularly harsh winter and volume was lower due to elimination of low value transactions that I just referred. While we continue to expect KSNET revenue and operating income to decline mid single digits through calendar 2018, we believe there will be a sequential improvement in Q3 and we should be able to return to modest growth after the end of this calendar year. To provide further clarity these regulatory issues affect largely the core of van business and our banking band payment gateway and new services of growing and showing good traction. These services currently only accounts for approximately 10% of KSNETs revenue but as they scale the impact will be more meaningful felt for KSNET overall. Before concluding and handing over to Dhruv, I would like to spend a few minutes on SASSA. To recap quickly, the constitutional court extended our contract with SASSA for 12 months to March 31, 2018 on terms and conditions that are substantially the same as our 2012 agreement with a few non-financial amendments. Both the expert panel and SASSA filed several reports with the Constitutional Court during Q2 and in early 2018, while a separate process was contacted in Parliament by scope [ph] and the interministerial committee or the IMC. The most significant development was the announcement by the IMC that it had brokered an agreement between the South African post office and SASSA in terms of which the post office will assume responsibility for the dissolution of social grants with effect from 1 April 2018. The agreement was high level in nature and did not outline specific details or tasks. Post Office informed SASSA that it was unable to fulfil the obligation for cash payments on 1, April 2018 and advised SASSA that a separate tender for this sanction should be issued. Post office themselves published three tenders on December 22, 2017 one for the procurement of EMV cards, the other for a multichannel biometric identification platform and the third for an integrated grant administration system. Presumably to equip themselves to provide the required services to SASSA. These been disclosed two weeks ago and we did not submit proposals for any of the post office tenders. On 12, January 2018 SASSA issued a tender for the cash payment of grants at paypoints only, this is for 2.5 million recipients that according to the tender will reduce by atleast 8% per annum over the five year contract. The current closing date for this tender is February 28, 2018. In the meantime, and in line with the recommendations made by the expert panel in the second and third reports to the constitutional court, we wrote a letter to SASSA on December 27 advocating the use of commercial bank accounts subsidized by SASSA to limit the impact of bank charges for the distribution of grant payments. SASSA has indicated that the subsidization of bank accounts will be considered if agreement can be reached with respect of participating banks regarding the functionality of the accounts being offered. SASSA has since engaged the South African banks to determine the feasibility of such an approach. This subsidy would enable grant recipients to access their grants through any bank account of their choice including the current [Indiscernible] SASSA cards or EPE cards through the national payment system like ATMs and point of sales or at pay-points. Our proposal allows any financial institution to participate in the payment of grants both as issuers and acquirers and provides beneficiaries with a choice to utilize the bank that is most convenient and cost efficient for them. On February 6, 2018 SASSA filed a notice of motion with the constitutional court asking them to allow CPS to continue to provide cash payment services to the social grant beneficiaries of SASSA who received their social grants by way of cash payments without personal identification numbers on an interim basis. And on the same terms and conditions as the payment as to those currently in place between CPS and SASSA for the period 1 April 2018 upto 30 September 2018, that is a direct record from the notice of motion. We will respond to this notice of motion as necessary. To conclude on SASSA we are doing our utmost best to cooperate with all the stakeholders who choose to engage with us to ensure uninterrupted grant distribution and an orderly transitional process. The infrastructure and technology established by CPS remains uniquely capable of providing transacting services in the rural and remote areas and there are multiple applications for these capabilities beyond the payment of grants that we are eager to pursue when our engagement with SASSA terminates. As always we will continue to monitor the progress and provide updates to our shareholders. The Net 1 management team including myself appreciated the opportunity to meet with a number of our shareholders at our inaugural investor day in New York in December. We look forward to many more opportunities in 2018. I am also delighted to be welcoming Alex Smith as our new Chief Financial Officer effective March the 1 and look forward to introducing him to our shareholders over the course of the year. Dhruv will now go over the financial performance and metrics in more detail and then I will circle back to provide guidance and closing remarks before opening it up for Q&A. Dhruv?

Thank you, Herman. I will discuss the key results and trends within our operating segments for the second quarter of 2018 compared to a year-ago. For Q2 2018, our average rand/dollar exchange rate was ZAR 13.67 to the dollar compared to ZAR 13.90 a year-ago, which positively impacted a U.S. dollar based results by approximately 2%. The rand/dollar cross continue to be volatile and has strengthened significantly in recent weeks to around ZAR 12 to the dollar. Revenue of $148 million in Q2 2018 was down 2% year-over-year in dollars and 4% in constant currency. Our fundamental earnings per share decreased by 9% relative to Q2 2017, and our fully diluted share count for Q2 2018 was 56.8 million shares, 8% higher than last year largely as a result of the sale of 5 million shares in Q3 2017 partially offset by the repurchase of approximately 1.2 million shares late in Q4 2017. Our quarterly results were impacted by an allowance for doubtful working capital finance receivables of $7.8 million. By segment the South African transaction processing reported revenue of $64 million in Q2 up 7% year-over-year in U.S. dollar and 5% on a constant currency basis. In rand, the increase in segment revenues was primarily due to higher EPE transaction revenue, as a result of increased usage of our ATMs, increased inter-segment transaction processing activities, and a modest increase in the number of social welfare grants distributed. Operating income and margin decreased primarily due to an increase in inter-segment charges, the impact of annual salary increases granted to our South African employees in October 2017, and increases in goods and services purchased from third parties. These decreases were partially offset by the aforementioned increases in segment revenue. Our operating income margin for Q2 2018 and 2017 was 21% and 26%, respectively. We continue to expect our South African processing segment margins to be in the low to mid 20% range during fiscal 2018. The margin will be affected by the continued rollout of our ATMs during 2018, and the inflationary pressures on our cost base in South Africa. Inter-segment transaction processing activities are eliminated on consolidation, but continue to have a meaningful impact on the segment results. International transaction processing generated revenue of $44 million in Q2 2018, flat on a year-over-year basis. Segment revenue was impacted by regulatory changes in South Korea on KSNET's revenue, largely offset by increased contributions from Masterpayment Operating income and margin during Q2, 2018 was lower due to the allowance of doubtful working capital finance receivables, segment operating income and margin were $2.8 million and 6% respectively. For Q2 2018 KSNET revenue decline 7% in the Korean One to $37.2 million, while EBITDA margin decline to 21% from 26% last year. As Herman stated we expect the impact of changes in Korean regulations to continue to have an adverse impact on reported results in 2018 and return to revenue growth in 2019. Accordingly we continue to expect EBITDA margin to stabilize in the low to mid-20s in fiscal 2018. Regarding the European component of the Masterpayment working capital finance book, we’ve entered into an arrangement with Bank Frick under which they purchased, excuse me one second – sorry, accordingly while the purchase, the remaining book of $36 million from us in January 2018 at its face value. We have use the proceeds from this transaction to settle the amounts due by us to Bank Frick under the €40 million and 20 million Franc revolving overdraft facilities and full, and these facilities have been cancelled and will be – and we will be released from our guarantees. Our financial inclusion and applied technology segment revenue was $54 million in Q2 2018, down 10% compared to Q2, 2017 on a constant currency basis. In Rand, the revenue decreased primarily due to fewer prepared airtimes and other value-added services sales, as well as lower as ad hoc terminal sales, partially offset by increased volumes in our insurance businesses, and an increase in inter-segment revenues. Operating income was also impacted by factors as well as an increase in the allowance for doubtful finance loans receivable of ZAR19 million or US$1.4 million, resulting from a commensurate increase in our lending book during the last lending cycle of calendar 2017. Our gross lending book comprising of capital out and deferred service fees at the end of Q2, 2018 was approximately ZAR1.2 billion compared to ZAR942 million at the end of Q4, 2017. We continue to believe our financial services offerings will sustain the segment's growth along with commensurate expansion of our fiscal and mobile branch and ATM infrastructures. At January 31, we had approximately 2.3 million EPE accounts. Our life insurance business SmartLife continues to sustain its momentum and we've sold more than 470,000 policies at the end of January 2018. Operating income and margin for the financial inclusion and applied technologies segment was 24% during each of the period, and was impacted by the factors discussed earlier. 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. Corporate expenses have decreased primarily due to lower transaction related expenditures, $0.5 million gain related to the sale of XeoHealth and lower executive compensation, which is partially offset by modest increases in U.S. dollar dominated goods and services purchased from third parties as well as director’s fees. Our Q2 2018 net interest income decreased to $2.9 million, with higher interest expense driven primarily as a result of the South African facility we obtained to partially fund our investment at Cell C, somewhat offset by a lower average long-term debt balance on our South Korean debt and a lower interest rate in Korea. And on the interest income side, interest income received from a loan provided to Finbond in October 2016, offset by lower average cash balances used to fund our investments. We recognized earnings from equity accounted investments of $1.4 million during Q2 2018 compared to $0.1 million last year. DNI and Bank Frick contributed for the full quarter however because Finbond is listed under JSE, we only include its reported six months' results after their report which is typically during our first quarter and fourth quarter of the year. Capital expenditures for Q2 2018 and 2017 were $2.1 million and $3.1 million respectively, and have decreased primarily due to the acquisition of fewer payment processing-terminals in South Korea. We continue to expect our quarterly 2018 capital expenditures to be significantly lower than in 2017. At December 31, 2017, our cash and cash equivalents were $64.9 million, and comprise primarily of Korean One denominated balances of 28.11 which $24.4 million, Rand denominated balances of approximately $22 million and U.S. dollar denominated balances of 11.4 million and other currency deposits primarily euros of 7.1 million, with all amounts translated at exchange rate applicable on December 31, 2017. The decrease in our cash balances from June 30, 2017 was primarily due to our investments in DNI, Bank Frick, Cell C and a $9 million listed note, scheduled repayments of our South African long-term debt, unscheduled repayment of our Korean debt in full, and growth of our South African lending book, and capital expenditures which were partially offset by cash generated by most of our core businesses. Apart from our lending arrangements we continue to fund the group’s operations and capital investments utilizing our cash reserves and cash generated from our business activities. We expect the majority of our cash generated in fiscal 2018 to repay principal and interest under our South African lending facilities and to fund our internal growth investments. Our effective tax rate for Q2 2018 was 53.8% compared to 31% last year, and includes $0.9 million related to the change in U.S. Federal Statutory law. Our Q2 effective rate was higher than the South African statutory rate as a result of the valuation allowance provided related to the $7.8 million allowance, but doubtful working capital finance receivables created, non-deductible expenses including transaction-related expenditure and non-deductible interest on our South African long-term facility, as well as the impact of the changes in the U.S Federal Statutory Tax Law. These changes to the U.S tax laws are not expected to have a significant impact on our future consolidated effective tax rate as we generate the majority of our taxable income in tax jurisdictions with high tax rate mainly in South Africa where income is tax at 28% and Korea where income is tax at 22%, and the new federal statutory rate of 21%. We continue to expect our effective rate for 2018 to be in the 34% to 36% range including the impact of the valuation allowance in the amount of $7.8 million. Our weighted share count for Q2 2018 was 56.8 million versus our actual December 31 share count of 56.8 million. Compared with Q4 our weighted share count was higher due to the inclusion of the 5 million shares sold in Q3 2017. I would now hand the call back to Herman for closing remarks before we open it up Q&A.

Thanks, Dhruv. In terms of guidance and to reiterate from last quarter we expect the funding of our Cell C and DNI investments to be dilutive to our fiscal 2018 fundamental earnings, partially offset by DNI's equity accounted earnings, but to be accretive on a combined basis from fiscal 2019. We therefore anticipate our fundamental earnings per share for fiscal 2018 to remain at least $1.61. Our guidance assumes no significant disruption in any of our key business units, a constant currency base of ZAR13.62 to the dollar, a share count of 56.6 million shares and a tax rate of between 34% to 36%. For clarity our guidance is always is on a constant currency basis and does not reflect the recent strengthening of the South African Rand. With that we will gladly take your questions, but as Dhruv mentioned that the onset, we are unable to take any questions related to SASSA or CPS at this time.

Thank you very much. [Operator Instructions] Our first question is from David Koning of Baird. Please go ahead.

Yes. Hey, guys. Thanks for taking my call. I guess first of all, which of the key initiatives that you talk about is really going to move the needle. And I guess my big question here is the international segment and the financial inclusion segments both are declining about 7% to 10%. I’m wondering when does that both of those shift to growth mode, I know the Korea business is part of that, but what really is the catalyst to get those both back to growth mode and what’s the date kind of by which both of those should be growing again?

Hi, Dave. I think the short answer to that is in the near term our initiative in South Africa around financially inclusion and specifically with Cell C, and DNI are the ones that will contribute meaningfully to the bottom line in the shortest period of time. Most of those are either complete in terms of the development that was required from a product or a tech point of view. And so we expect those to start contributing meaningfully sort of commence in Q3, scaling up in Q4, but definitely during fiscal 2019, I think we will see really meaningful contribution from those specific initiatives. And in second of all, the traction that we’ve now got in the international payments group specifically with the consolidation of the various business activities and units and the sales pipeline that we have in place on the specific market that we are focusing on, those have already started to show significant growth if we look at our processing volumes in December they were already significantly higher than in the previous quarters or months. And so, I expect that those will scale and ramp up as well significant during Q3 and Q4. UEPS international joint venture is a longer term opportunity. The sale cycle as you know for those sort of systems is quite long, so we expect that to be sort of 12 to 18 months initiative before we start seeing real results, but of course once those initiatives are concluded and implemented they have a significant impact just in terms of the scale of what we anticipate to do.

Okay. Good. Thank you. And then I guess within the financial inclusion is that the prepaid airtime, is that continuing to decline and does that – that’s kind of meaningless I guess to the margin side of it, but does that turn and get better at some point or maybe doesn’t matter?

It's flattened up. So if you look at gross that I think we presented on the supplementary slide show. We’ve seen a bottoming out of impact of introducing the biometric identification tools. Those implementations will anniversary I think during Q3 as well in terms of when we first introduced them. So there’s been a flattening out -- and you’re right, it doesn’t have a very big impact on the margin side of things simply because airtime is very low margin product, but obviously it’s got an impact on the revenue side of things. So, the margin impact although small I think has now been stabilized and going forward we will see – I don’t think we’ll see any further declines and with the introduction of the new products and services that we’ve got planned with Cell C, I think we should see an uptake in specifically the sale of prepaid airtime.

Great. And just one last quick one, the margin profile of the company, it looks like the Masterpayment working capital finance [believing] [ph] it’s a small revenue but also small profit dollars, there’s investments and other things. I’m just wondering all the puts and takes, is this something over the next 12 months margin should lift as the mix changes or decline? How are you thinking the margins over the next several quarters?

Well, I think we’re looking at definitely improving the margins. There were a couple of contributors that had a particularly significant impact on lowering the margins over the last few quarters. The key ones obviously we spoke about, the KSNET experience the bit of the margin squeeze as a result of the introduction of the new regulations in Korea and also the no CDM introduction for transaction less than $50. And as you know, KSNET [indiscernible] significant contributor overall to both revenue and the operating margin line. I think that’s now stabilizes and we also anniversary out over the next few quarters. The Masterpayment book obviously had a fairly low marginal impact on us. So the removal of that business should result in our margins improving. And I think the continued focus on costs and the management of the group overheads over the next 12 months there’s obviously an active and conscious attempt to make sure that those are well controlled will also result an improvement in margin. So from my perspective going forward for the next six to 12 months I believe that we can get our margins back to where we use to see them a couple years ago.

Thank you very much. [Operator Instructions] Our next question is from Allen Klee of Sidoti. Please go ahead.

Yes. Hello. For this Cell C and DNI investments can you just walk us through little bit of the time line and potential economics of how you see or how you going to make money there?

Sure. So Cell C obviously just to put it in context is 15% investment for us. So it’s not a controlling stake and it’s even below an equity accounted stake. DNI on the other hand we are a 45% shareholder, so we have significantly influence in DNI and we equity account for that accordingly. And the way we got to look at this is how do we combine the strength, the relative strengths of all three components. So Cell C brings to us the ability to define and come up with products that we believe are missing from the market segment that we service. And so, when we look at the financial inclusion side of the market, the same segment where our EasyPay Everywhere account offering is pitched at, our Smart Life insurance offering are pitched at etcetera, there is an enormous need for specific products that provide a combination of voice and data and social media, communication, capability, these are products that are prepaid and are micro amounts in nature. Our knowledge of that market makes it possible to assist Cell C to define the right products to address that market segment. That is a process that it’s not instantaneous, so although we all know exactly what it is that we want, the definition of those products and the ultimate loading of those products on to the Cell C system obviously takes a couple of months. We ran our first pilots based on what we believe the [indiscernible] products offerings are in December. We are tweaking those, so we think that we can be in a position to launch it in a meaningful way in the next quarter. So Q3 for us is going to be a significant quarter in terms of launching those, what we call lifestyle products. DNI is obviously a significant component of what we do, because they bring to us the ability to expand our footprint from a distribution point of view into the urban areas. So Net 1 has a particular strength in the rural areas through our branch network and our sale forces that we’ve built up in our money line business unit, so we’ve got roughly 2500 employees in our segment, DNI brings another 2000 employees probably more urban and semi-urban based. So there’s no real timeline to win the investment that we have in DNI will provide us with synergistic benefits. That is simply assumption of us getting the right product set together and then getting it out into the hands of the salesforce to sell and to roll out into the entire national footprint that we have. So if you look at all the products combined in association with Cell C and DNI, I think we said that by 2020 we expect them to generate between $0.25 and $0.50 of earnings-per-share. So 2020 is not that far away, we’re talking two to three-year period and so we expect them to contribute between I would say a quarter and a third of our earnings per share – of our current earnings per share at that point in time.

Okay, great. And then for your Hong Kong, Chinese related business can you just give us a little more of an update on that?

Sure. So our business in Hong Kong Transact24, now part of the international payments group. So we have consolidated all of the licenses that we have, our e-money licenses as well as all various issuing and acquiring relationships under one umbrella. The founder and CEO of T24 Philip Meyer is now the business unit leader for all of these activities, that’s not only the Hong Kong-based business but the international business when it comes to issuing and acquiring and processing. On the areas that we focus specifically on when it comes to the east or specifically China, the processing volumes that we’ve seen from our Chinese processing activities, there is a slide I think that we’ve provided that shows that there’s been quite an increase in Chinese processing. It is a business that is seasonal and to an extent, so we would expect to see a larger increase during some quarters than during others. But the business is growing and it’s doing well. And of course the introduction of processing for Bitstamp which is European based exchange, not really sort of Hong Kong or China based had a very positive increase overall on the processing volumes for the international payments group. And then the area where you will see, if you look the deck, we’ve had particular strong increase in processing volumes in on the SEPA, which is an acronym I think for Single European Payment areas which is just really the equivalent of ESP debit in the European Union. That’s an area where we’ve spent a lot of time and efforts in terms of getting our systems really to perform those transactions and if you look at the deck you’ll see that there’s been a magnitude of I think three or four times increase in the processing volumes. So, we are excited about the way that all of these individual components that we’ve accumulated over the last two or three years has finally come together. I think that we now have under our control all in association with our investment in Bank Frick, every aspect of what is required to provide and to run through end to end solution as far as international payment, processing, acquiring and issuing is concerned.

Good. If I can ask one other thing, in India you’ve talked about MobiKwik, I miss you were referring to something else after that, if you could just remind me what that was? And then just how you think about the opportunity in the country?

Hi, Allen, this is Dhruv. So what we’d said beyond just a VCC project is that we are making progress in terms of identifying how to deploy our UEPS solution in the country and that obviously requires a number of local stakeholders that have to be educated and brought into the fold. We’ve also made some progress in terms of developing international remittance products which we will start within -- remittances into India and then eventually look at for the group for other countries. And then the last part that we talked about was receiving a ACS certification from Visa within the next 30 days which would allow us to do effectively the second factor authentication which is a requirement for card not present transactions in India. So those are the things that we talked about. I mean, how we think about the market. First of all for the group it’s critical for us to demonstrate success whether we can succeed in India we can succeed anywhere in the world. The second is the margin profile in the country is generally across the board very thin, so it has to be a volume and scale game and that’s where the partnership with MobiKwik is critical for us because they help us bring the scale much faster. And then as we sort of expand on that with the additional product offerings that how we start to build a long-term and sustainable and sizable business model for the group.

Thank you very much sir. [Operator Instructions] Our next question is from Stephen Rossini [ph] from University Bank [ph]. Please go ahead.

Thank you very much for taking my question. First of all, congratulations to you and your team for excellent management progress during the quarter.

Thank you.

My question my question revolves around Bank Frick and the regulatory compliance regime there with respect to the opportunity to outline with cryptocurrencies? I think its obvious that many bankers around the world has thought hard about getting into cryptocurrency business, but local regulatory restriction from their own bank regulators has held them back. Can you describe a little bit the regulatory regime in Liechtenstein? And what practical or legal limitations you do have on your cryptocurrency business there? Or is it truly unlimited?

Unfortunately I think they are having unlimited capabilities from a regulatory point of view are long gone. And so in Liechtenstein specifically there is a very, very active and dynamic rate banking regulator. The country is as you know quite small, which means that – and the number of banks also quite limited, so there is very active oversights in the banking sector. I think what we do have is a regulator that is very progressive in terms of how the emerging trends across the world in terms of payment and currencies emerge. So we have a regulator that’s willing to engage, willing to listen and willing to assist us to figure out what is doable, what is not. Most importantly to come up with fully regulated solution. So if we look specifically at things like cryptotrading and cryptoexchanges it is I think a vital importance these days with all of the various events that we’ve seen and the hacking that’s taken place with some of these – that an absolute requirement for ICOs and exchanges to have the ability to do safe custodianship of the underlying assets. And that something that I think only a bank that is fully regulated can really bring to the party. So that’s a very critical component of what we think Bank Frick can bring. The key thing to understand is that whatever it is that we do is still at a full mercy and oversight of the regulator, but as I said the benefits w have is that we have an accessible regulator that is really willing to listen and to look at any application that is submitted and to debate that no matter what the underlying instrument is.

Thank you very much sir. Ladies and gentlemen, we have no further questions. And with that we will conclude today’s conference. Thank you for joining us and you may now disconnect your lines.