Good afternoon, ladies and gentlemen, and welcome to Net 1's UEPS Quarter 3 2018 Earnings Conference Call. All participants will be listen-only mode. [Operator Instructions] Please note that the conference is being recorded. I'll now hand the conference over to Mr. Dhruv Chopra. Please go ahead, sir.

Thank you, Judith. Welcome to our third quarter 2018 earnings call. With me on the call today is our CEO, Herman Kotzé; and our new CFO, Alex Smith. 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 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've 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 analyzed 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. We will have a question-and-answer session following our prepared remarks. So with that, let me turn the call over to Herman. Herman Kotzé: Thank you, Dhruv. Good morning to all our shareholders. In our first quarter, in an almost post SASSA world for Net 1, we have multiple emotions to deal with. On the one hand, now that the Minister of Social Development, Mr. Susan Shabangu has made it abundantly clear that CPS will not be playing a role in the distribution of social grant as a contractor to SASSA beyond September 2018, we have the visibility to be able to plan for a wind down of CPS, and focus our energies on our Fintech and financial inclusion solutions for the financially excluded citizens…

Thank you, Herman, and good morning to all our shareholders. I will discuss the key results and trends within our operating segments for the third quarter of 2018 compared to a year ago. For Q3 of 2018, our average Rand dollar exchange rate was ZAR11.95 compared to ZAR13.22 a year ago, which positively impacted our U.S. dollar-based results by approximately 10%. Revenue of $163 million in Q3 2018 was up 10% year-over-year in dollars and down 1% in constant currency. Our fundamental earnings per share increased by 101% relative to Q3 2017, on a constant-currency basis and includes a fair value adjustment net of tax related to our Cell C investment of approximately $0.52. We recognized a noncash increase in the value of our Cell C investment due to its improving profitability, driven by double-digit top line and subscriber growth as well as new products. This amount has been included in fundamental earnings, because we believe it is appropriate for the returns generated from this significant investment to be included in any assessment of the company's performance. Our quarterly results were adversely impacted by an impairment loss of $19.9 million related to Masterpayment and Masterpayment Financial Services goodwill as a result of the change in its business strategy to refocus on transaction processing as part of the International Payments Group. The management team is now focused on delivering the IPG strategy as discussed by Herman earlier. By segment, South African transaction processing reported revenue of $74 million in Q3 2018, up 15% year-over-year in U.S. dollars and 4% on a constant-currency basis. The growth in this segment revenue was primarily due to a higher number of EPE accounts and ATM transactions. Operating income and margin decreased primarily due to an increase in intersegment charges, the impact of annual salary increases…

Thank you very much, sir. [Operator Instructions] The first question comes from Allen Klee of Maxim Group.

Yes, good morning. Can you talk a little about your EasyPay offerings and how they compare to - what's the competitive advantage you have? And how you think about the ability to continue to grow it, if there is any change in the competitive environment as the Post Office will be offering cards to some of the other population that you had served? Herman Kotzé: Sure. Thanks, Allen. I think, the first thing to understand on the EasyPay Everywhere, the EPE offering, is that we already have a base of 2.7 million cards. So we're already a substantial player in this space. It's a well-known product. It is a well-known brand. We like to think it's a well-respected brand. And there are a couple of things that we believe differentiate our offering from those offered by other institutions, including the South African Post Office. The first is the infrastructure that we have deployed and that we have available to service our customer base. Most of the South African retail banks over the last decade or so have actually closed down their presence or their branches in the rural areas of the country. By contrast, we have increased our presence. And so most of the 141 branches that we have today, which we hope to increase substantially over the next couple of months, along with the branches from the associates' investments that we have in Finbond, those are all mainly rural and semi-rural based infrastructures. That obviously gives us the ability to be much more visible and to be able to service our customer base much more efficiently and effectively, also allows us to do marketing to those people, right where they live on the ground. The second thing that we think is one of our compelling differentiators revolves around the…

Thank you. And then, yes, just following up on the last part of that with Cell C and DNI. It sounded like you talked a little about how the growth opportunity there and synergies with your existing business. Could you just expand on that a little more? Herman Kotzé: Yes, sure. So DNI in itself, obviously, we hope to have a controlling stake in that business by hopefully the end of this fiscal year, so by 30 June. DNI brings to us a variety of assets and infrastructure that complements what we already have. So within DNI, we've got roughly 2,000 employees. These are employees that are mainly mobile-based, so they travel around in minibus vehicles all around the country to service the greater population. Today they are very focused on the provision of airtime and starter packs, so prepaid SIM cards to the South African population, so they focus on large events, sport events, religious gatherings, et cetera, et cetera. They are very active in the urban areas of the country. Whereas our classic Net 1 infrastructure is more rural and semi-rural based. So the DNI footprint brings to us a big portion of the urban areas where traditionally we weren't as strong as we had hoped to be. Similarly, from a Cell C perspective, Cell C obviously is one of the mobile operators also operates an infrastructure around the country. It also has branches. It also runs container services. And so over time, we hope to also leverage the Cell C infrastructure, so that between Cell C, DNI and Net 1, through our combined workforces and we're talking about probably 6,000 to 8,000 people, and probably close to 1,000 locations across the country, we would be able to service and to sell all of our products, whether it's a bank company, an insurance product, credit product or an airtime product. And it's only by having this partnership and this relationship that we will be able to actually fulfill what we believe is possible.

Okay. Thank you. And how do you think about longer term ability of these type of offerings and the other things you're doing in South Africa to be able to offset the loss of the SASSA-related revenue and earnings? Herman Kotzé: Well, in the long term, we believe that it will more than offset the loss of earnings that we will -- SASSA as a result of the severance of the relationship we have with SASSA. So at the moment, the relationship with SASSA is a very simple one. We get paid a fixed fee to do a grant payment, and we are restricted in terms of really performing any other functions with the CPS or the SASSA infrastructure. So effectively we've got 2,000 people today singularly focused on providing a single payment service. Once that is unlocked and we can convert that infrastructure or that workforce, along with all of the infrastructure associated with it in terms of ATMs, in terms of point-of-sale distribution and marketing capacity, we believe that in the very short space of time, we will be able to really replace the revenue and ultimately it's all about the profitability of what the SASSA contract has meant for us over the last 6 years. Obviously, we understand and I think everybody is aware of the fact that we're not going to be able to convince all 10.8 million current grant recipients that they should convert to a Net 1 product or an EPE card. But we certainly hope that we will be able to convince a significant portion of them. And we certainly don't need to convert the full base in order for us to maintain our profitability levels. Like I indicated, as part of my discussion earlier, at the moment, for the next 12 to 18 months, we're targeting roughly 50% of what we believe the target market is. So the target market is anywhere between 10 million and 15 million people. And so over the next 12 to 18 months, we would like to target 5 million of those and we believe that, that will be more than enough to offset the contractual losses that we will have from SASSA.

Thank you very much, sir. [Operator Instructions] The next question comes from John Flynn of WEDGE Capital Management.

Just had a quick question for you on KSNET. So you mentioned in your comments that you believe KSNET will stabilize towards the end of this calendar year and going forward. But, I guess, we could use a bit more clarity on what that means? The profitability has fallen quite a bit with the changes in the regulations. So when you say stabilize, are you thinking of the current level or is there a normalization of the business and the cost structure that can -- than will happen over the next nine months that will lead to a perhaps higher level of stabilized margins or earnings at KSNET? Herman Kotzé: Thanks, John. It's a fairly multifaceted question. When we - first of all, when we look at the stabilizing of what's happened in the South Korean markets from a regulatory point of view, we first would like to stabilize the revenue side of the business, the top line. That's obviously where we've seen the biggest impact, simply because the pricing - the price component has come down substantially. We need to supplement that with significant volume growth. So that's the first focus point for us. And we believe that over the next fiscal year, if we look at fiscal 2019, we will be able to at least show some low single-digit growth numbers on the top line, and that's really because of an increase on the volumes rather than an increase in pricing. Also secondary to that, we hope to expand our other core services that we provide. So mainly our banking VAN service, which is really a direct EFT service or - and in addition to that, our payment gateway business. So that's the first focus point for us. There will be, in my view, a delay in terms…

Okay. Thank you. And just quickly on India, with MobiKwik, could use just a bit more information on how you anticipate this to develop there. There has been delays and a few hiccups, as you mentioned, so just some more clarity on how you view the next 12 to 24 months progressing for MobiKwik. Herman Kotzé: Sure. I will let Dhruv come in here. Dhruv as well is our head for India. But Dhruv is obviously quite closely involved on the relationship with MobiKwik and what we plan to do with them. There are always, just from my perspective, there are multiple issues in India that one has to contend with. The government is really very active in the payments space. We have a lot of new regluation coming in from time to time, so having to do, as an example, with certain new requirements around KYC for digital wallets, which is something that wasn't there before. So there's that to contend with. There's also a common interoperable wallet testing that's been developed by government which we have to contend with. But overall, I think the launch, finally, of VCC with MobiKwik is a big milestone for us. Obviously, it's only been going now for about two weeks on both the iOS and Android platforms, but already the growth in volume and the uptake rate has been quite encouraging. But Dhruv, maybe you could just give us your views going forward over the next year or so, where you can see this going.

Sure. So, obviously, we've now got the project live, and the anticipation is that we will continue to increase the penetration within the MobiKwik client base. So you're looking at a runway of potentially millions of customers over time. The revenue model on VCC for the specific deployment is a combination of license fees and transaction fees. So we will continue to work with MobiKwik as we continue to do that. But as we look at MobiKwik and India more broadly, we've got potential products and projects that we're looking at with MobiKwik specifically, that we are contractually in agreement with them to kind of roll out over the next 12 months. And outside of that, we would figure out some opportunities that we're evaluating particularly more so on the UEPS side, which wasn't formally part of the India strategy. So it's taken us a while to get this first project going, with a lot of the work being done toward some of the other ones. We hope to get them up and running and ramped up a lot sooner than it took us to get VCC going.

Okay. Thank you.

[Operator Instructions] The next question comes from Will Settle of Woodmont.

Yes, just wanted to follow up to the KSNET questions earlier. So, in your Investor Day, you highlighted KSNET, and I guess the fiscal '17 EBITDA level of $42 million-or-so. I mean, is returning to that a potentiality or we just in a new environment with the regulations, and what the kind of future level is remains to be seen, you seem pretty hesitant to kind of pinpoint that whereas as back in December you're highlighting that as a number and attaching a value to it? Herman Kotzé: Yes. We certainly wanted return to that level of profitability. I think, it will take us probably most of fiscal 2019, on a monthly run-rate basis to get back to that number. But for us, it is an absolute priority to ensure that what we've lost by way of profitability, we can regain through a combination of 3 things, right? The first is, as I've indicated, increasing on the volume side. That we can see happening as the smaller VAN companies are being squeezed out of the market due to these developments. The second, of course, is the increased marketing and uptake of our direct EFT and Payment Gateway products. It is a highly competitive market as well in the Korean space. So as you can imagine, most of the Korean retailers have an online marketplace. Most of them make use of Payment Gateway services, and a lot of those payment Gateway services are actually offered at cost or below cost by some of our competitors. So that's something that we always need to be aware of and alive to. And the third thing is, through the introduction of new products and services, I think the most notable product which we've introduced over the last year or so, is a very targeted, very focused working capital finance facility. So -- and again, because we deal primarily with the SME market in South Korea, we've got 250,000 small retailers, most of them are quite keen to have access to 30 or a 60 or a 90-day facility to expand their businesses, to buy more stock. This is an area where we believe we can add in a tremendous amount of value and is obviously also a lot more profitable than just the pure processing side of the business. So through a combination of those 3 things, we hope to bring our EBITDA levels back to the sort of $40 million, $42 million level within the next 12 months.

This is Dhruv. Just to close out on than point. So we used to be at mid- to-high 20% EBITDA margin on KSNET. So on an absolute basis, I think we can get back as Herman has pointed out the reasons to where we were. But the new normal, probably with the pricing cut is probably a low- to mid-20% EBITDA margin.

Great. Thank you very much gentlemen. That was the final question. On behalf of Net 1 that concludes this afternoon's conference. Thank you for joining us. You may now disconnect your lines.