Lesaka Technologies, Inc. (LSAK) Q4 2018 Earnings Report, Transcript and Summary

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

Thank you, Irene. Welcome to our fourth quarter 2018 earnings call. With me on the call today is our CEO, Herman Kotzé; and our CFO, Alex Smith. Our press release and a supplementary financial presentation are available for - on our Investor Relations website, ir.net1.com. We expect to file our Form 10-K in a couple of weeks or sooner. As a reminder, during this call, we will be making forward-looking statements, and I ask you to look at the cautionary language contained in our press release 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 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 Q&A session following our prepared remarks. So with that, let me turn the call over to Herman. Herman Kotzé: Thank you, Dhruv. Good morning, and good afternoon to all of our shareholders. We are eagerly counting down the days to the expiration of our contract with SASSA, 32 days to be exact. While we are proud of our achievements and social upliftment to millions of underserved South Africans over the past 6.5 years, the unfounded media allegations, challenges by competitors and NGOs not to mention sometimes hostile political positioning has been very distractive to the company and its shareholders. We remain on track to exit the obligations to SASSA and the Concord as the number of beneficiaries paid during Q4 2018 declined by approximately 82%. Despite this reduction and our conservative revenue recognition policies on CPS revenues, our South African transaction processing and financial inclusion businesses have demonstrated that they are sustainable, differentiated and competitive, fueling our strategy to further expand our fintech offerings in South Africa and internationally. We are proudly South African and are incredibly privileged to have run one of the world's largest and most successful social grant distribution programs, paying on time and without disruption for the past 6.5 years, while using our biometric technology to save the South African treasury over ZAR 2 billion per year as recognized by SASSA in their annual reports. We will finally have the freedom and bandwidth to focus on our financial inclusion initiatives in South Africa and abroad that we expect will return it one, to being a consistently profitable growth company without being burdened by fixed-term contracts or with political or other motivations. With this in mind, and hopefully for the last part of our earnings call, I need to spend more than a few minutes on providing you with an update on our SASSA contract activities before I turn to the important aspects of the group's other activities and our future strategy. As we expected, the transition from CPS to SASSA and the South African Post Office, or SAPO, for the country's welfare grant payments has been complex and tumultuous thus far and given some events we've discovered in the last 48 hours or so, it may still get worse before it gets better. I would like to refer our listeners and investors to our recent South African media release, which is available on our website, where we have warned grant recipients and government officials of the potentially catastrophic potential of disruptions of service in the September pay cycle. We have also put SASSA and SAPO on notice for a new underhanded and potentially illegal conduct, where they are forcing unsuspecting grant recipients without their knowledge or consent to receive the grants through the new SASSA/SAPO card, in turn taking away their constitutional right to choose how and where they wish to be paid. Approximately 800,000 grant recipients with a valid current SASSA card, who used to receive the grants at our cash pay points will not receive the grants into these accounts in September and will soon find out that they have no other option, but to travel to a SASSA or SAPO office to resolve the issue and presumably be issued with a new SAPO card. Given SAPO's challenges to efficiently board new clients as highlighted in the expert panels of last report, the surge in volumes could have disastrous consequences for beneficiaries themselves. In addition, approximately 900,000 grant recipients, who elected to receive the grants into our EasyPay Everywhere accounts by completing the required documentation will not receive their grants into these accounts for September and will suffer a similar fate because SASSA has not processed the supporting documentation in certain instances and is forcing existing EPE clients to receive the grants through the new SASSA/SAPO card even though they have legitimately elected to be paid through EPE. We are concerned that a large amount of these grant recipients will arrive at our pay points and will have to be turned away, all attempts to access their grants through ATMs and point-of-sale devices with no success due to insufficient funds. To make matters worse, SASSA is aggressively closing down thousands of pay points and CPS has this week been instructed not to service any pay point in 4 of the 9 South African provinces. This will create further confusion amongst grant recipients. I have no doubt that SASSA and SAPO will yet again attempt to lay the blame at our door by portraying our criticism of and concerns about the dysfunctional phaseout process as an attempt to prolong our services as a social grant paymaster and that we only care about making money for as long as possible from this contract. I want to categorically state that we fully intend to end our contract with SASSA on 30 September in accordance with the Concord's order. In addition, the contract has been unprofitable for some time, and it is not in our commercial interest to continue, so the argument that it is all about the profits is simply unsustainable. As a proudly South African corporate citizen, we are deeply concerned about the unnecessary stress and hardship that SASSA and SAPO's actions have caused to grant recipients during the last two payment cycles, especially in July and will continue into September. It makes no sense that grant recipients are forced to utilize new accounts with being provided with the required -- without being provided with the required terms and conditions, appropriate education on the consequences of closing an actively used account and forcing them to use unsecured pin numbers instead of biometric verification when they are often old and illiterate. The SAPO distribution network comprising of post offices and ATMs in the national payment system is also wholly inadequate to service the large number of grant recipients in rural areas. We, therefore, expect these uncertain times to prevail for the next two quarters. But what is clear is that Net 1, while not playing a direct role in grant payments going forward, will continue to offer banking solutions to this market segment as we have built out and operate the only payments infrastructure in place to effectively and properly service these constituents in close proximity to where they live. We welcome any fair competition that ensures the best product at the best price to these constituents. The conclusion of this sordid affair will bring us to an exciting new chapter in Net 1's history. And starting in fiscal 2019, the transformation of our business into a sustainable and profitable global fintech company. I will now turn to our other businesses and strategy. Our strategy going forward will focus, primarily on the 3 following areas. One, in South Africa, where we intend to further expand our transaction processing and financial inclusion product and services to the unbanked and underbanked by leveraging our unparalleled last mile infrastructure and synergies with DNI, Cell C and Finbond. Two, IPG, or the International Payments Group, having aggressively consolidated our international assets under IPG during fiscal 2018. Starting in fiscal 2019, we will unveil our new go-to-market brand and end-to-end issuing, acquiring and processing solutions to underserved small businesses in the coming weeks. IPG will, in collaboration with Bank Frick, also continue to expand its blockchain and cryptocurrency processing and storage solutions. And third, international expansion of our payment solutions activities, including around UEPS/EMV, virtual card and other new payment technologies within Net 1 and in collaboration with our key strategic investment partners being Finbond, Bank Frick, MobiKwik and One Finance. Starting with South Africa. First, let me begin with EasyPay Everywhere, which is our independent consumer-focused card issuing strategy in South Africa through the provision of a low-cost transactional bank account. As we discussed previously, preparations for our post-SASSA contract strategy in South Africa actually began in May 2015 with the launch of EasyPay Everywhere, or EPE and the deployment of our interoperable card acquiring network in the form of ATMs and point-of-sale devices at strategic locations. Since that launch, over the past few years, we've added almost 3 million accounts with account growth reaccelerating in fiscal 2018. Importantly, over this period, we've had a negligible number of accounts closed or churned, further proof of the value of this mobile banking product and the access to other services that it provides. However, as I've just described, the recent campaign undertaken by SASSA and SAPO to reregister wealthy grant recipients to the new SAPO-issued SASSA debit cards has caused considerable confusion among this group of account holders, specifically been told by the minister and SASSA that they can only receive the grants if they have a newly issued SAPO card. Thus, while we continue to experience the same rapid level of new account growth. For the first time, we are also experiencing meaningful attrition in our base. Importantly, SASSA's insistence on the conversion of the entire grant recipient base to the new SASSA/SAPO card is not in line with regulations or a recipients constitutional rights to choose an account of their choice. Recipients can elect to receive their grant in any bank account they choose, and we are confident that benefits, accessibility, functionality and the additional services available from EPE will ultimately win adoption and continued loyalty once this option again becomes apparent to our customer base and the noise around the contract expiration subsides. We anticipate this situation to remediate itself quickly as SASSA and SAPO completes this registration process in the next few months and also as we increase our own marketing efforts. We now expect the number of net active EPE accounts to be between 2 million to 2.5 million during Q1 2019 and then grow modestly of that base through the remainder of fiscal 2019. We also expect ARPU for this account base to remain flat to up 5% for fiscal 2019. EPE remains a key driver of our South African consumer strategy and will further be supplemented by synergies with Cell C and DNI, which we believe will begin to fuel the addition of higher income EPE users. We fully expect to hit our targets of reaching more than 5 million EPE customers, though, given the recent actions by SASSA during the backend of the contract termination process, we believe it is prudent to push out the time line for our target by three months that is to December 2019. We will continue to articulate the progress we have made towards this every quarter. The synergies created by our investments in DNI, Cell C and Finbond create both new distribution channels and additional product offerings, as we redirect our significant resources away from our SASSA contract obligations to growing our EPE consumer products and financial inclusion platform. EPE provides access to our ATM and point-of-sale infrastructure, utilizing our last mile connectivity as well as access to the cheapest financial inclusion products. We have also identified an opportunity to expand our mobile ATM and proprietary point-of-sale acquiring business to accept cards from all other banks, which we believe will further supplement our transaction processing activities in South Africa. Since we commence this initiative, the number of non-Net 1 customers accessing our fixed ATM infrastructure has increased from 124,000 in March to 310,000 at the end of June. We believe the number of individuals utilizing our infrastructure will increase meaningfully, once we make our mobile ATM infrastructure interoperable. Our branch network has grown from 150 to 169 branches, and we expect this to grow further to 180 branches over the next 12 months. Similarly, our fixed ATMs are expected to grow from 1,100 to over 1,500 this fiscal year. And together with the interoperability of our mobile ATMs, another 800-plus ATMs will become accessible to customers of any bank. Our card acquiring initiative is, therefore, the important other part of our South African strategy. With Finbond, we have completed the development for them to become an issuer of UEPS/EMV cards, and we are waiting final certification from the card networks. We expect to commence with issuance of cards in the second quarter of 2019. Finbond themselves have over 450 branches in South Africa. Together with Finbond, we would have over 600 branches and 2,000 ATMs, giving us a combined network that will rival any of the large retail banks in South Africa. Our financial services offerings tie into and are an integral part and differentiator of our EPE offering and our loan book and insurance premiums continue to expand. Second, I wish to discuss the developments in our telecom-related investments, namely DNI and Cell C, and how they tie into our South African strategy. We consolidated DNI, effective the end of June 2018, and its operating performance will be consolidated in fiscal 2019 with after-tax minority interest of 45%. DNI posted profit after-tax of approximately ZAR 280 million, and far exceeded its projected financial targets of ZAR 230 million to ZAR 250 million for the full year ended June 30, 2018. Now that DNI is a group subsidiary, we will be able to accelerate our joint projects to leverage our complementary distribution networks, contracts and products to deliver comprehensive lifestyle products to our customers. DNI itself has some exciting and disruptive technologies, such as its micro-jobbing application that provides income generating opportunities to all South Africans and can become a lifeline for the many unemployed citizens and not only in South Africa but internationally as well. Finally, to Cell C, they recently announced tower-sharing agreement will be transformational for Cell C, DNI and Net 1 and the South African public as it removes one of the biggest barriers for our low-cost products, which was limited interest and overlap with our customers due to poor signal coverage. This tower-sharing initiative is expected to become fully operational by November 2018 and will seamlessly take up Cell C's 4G coverage from 33% to 80% of the country. This means that our customers will finally see Cell C as a dependable operator in their regions and together with our ability to create and price attractive lifestyle products will benefit consumers as well as all 3 organizations. Cell C last week reported interim results for the 6 months ending June 30, 2018. And while I will let Alex discuss the financials, I wanted to note that the operating metrics and performance continues to trend in the right direction, demonstrating returns on the investments they have been able to make following their recapitalization last year. Next, I will focus on the second component of our strategy being international and IPG, in particular. As a reminder, over the course of 2018, we have consolidated our various international assets, including T24, Masterpayment, Masterpayment Financial Services in Malta and our investments in Bank Frick under one entity currently called the International Payments Group. This entity, which will soon operate under a new brand has consolidated the various businesses closed down nonstrategic operations, such as working capital finance to nonpayment solutions customers and undergone various restructuring activities. We have appointed several new business development and sales executives to help drive the expansion of this business. Over the past quarter, IPG has made progress in identifying new bank partners, new products and channels and building on its newer blockchain and cryptocurrency processing initiatives. Development for its new multicurrency issuing platform called Atlas and a new card management system, [Kaleidoscope] is complete, and we expect MasterCard and Visa certification during the second quarter of 2019 -- fiscal 2019. In addition, IPG is working on a solution to consolidate all its processing offerings with single-point integration. The offering will include instant onboarding of merchants to accelerate scale and could meaningfully enhance its value proposition for small merchants, particularly in Europe. Net 1, in collaboration with Bank Frick, is exploring a new generation of crypto asset custodial products, addressing what is arguably one of the most significant and unresolved challenges that exist in the crypto industry. The objective is to deliver a holistic product that leverages Net 1's core cryptographic blockchain biometric verification and hardware security module knowhow, underpinned by a modern compliance and regulatory framework to offer the crypto asset storage solution of the future. Research and development is already underway, with the Net 1 blockchain division to deliver the best-in-class technology solutions to some of the most persistent security issues in the crypto industry today. IPG with its U.K. and EU regulatory licenses along with Net 1 India is also defining a new cross-border payment product to further leverage our strategic investment in MobiKwik. Bank Frick for its part has firmly established its position as one of the leading blockchain technology banks in Europe and has made significant investments in this area over the past 6 months. It has expanded the range of cryptocurrencies\ for which it to offers trading to institutional investors and custodian services and Liechtenstein has recently become one of the first countries in the world to publish progressive draft regulations for blockchain and cryptocurrency activities. In India, we launched our virtual card project with MobiKwik in late April this year. To date, we have controlled the number of users added daily due to a merger by our issuing bank partner. And earlier this week, we received approval to start accelerating new customer onboarding, resulting in a 15% increase in registered users this week alone. We have seen very positive trends in the take-up and usage among the registered user base, which currently stands at 65,000 users. For the three month period ending August 2018, we have processed approximately 75,000 transactions, which is a sequential increase of 176%, and transaction processing value was INR 2.1 billion or approximately $3 million, a sequential increase of 256%. Approximately 70% of the spend on virtual card is at locations where the MobiKwik wallet is not accepted, thereby adding meaningful value to their acceptance network. We are currently also evaluating the rollout of multiple other products, including the cross-border payment initiative with IPG. MobiKwik itself has rapidly transformed from being a pure digital wallet player to a digital financial services provider, which more closely aligns to Net 1 strategy. Their lending business launched about 6 months ago, has seen rapid adoption. And by number of loans issued daily, they have already become one of the largest digital lenders in the country. MobiKwik will continue to expand its range of offerings, including insurance, wealth management and remittances. In Nigeria, our investment company OneFi is the first neobank in sub-Saharan Africa offering loans, fixed savings and payment services to its customers via its proprietary 100% mobile app platform Paylater. In 2018 alone, so far the company has processed over 1 million loans using its machine learning algorithms that preclude the need for any human interaction. The company is expanding its product line to include credit cards, insurance and personal finance management in keeping with its mission to provide financial services to the next billion and will expand to 2 other countries in West Africa by the end of this calendar year. Net 1 continues to be excited by and support of all the expanded OneFi business model. Similar to the other major neobank platform, such as Revolut, N26 and Nubank, OneFi's ability to impact and revolutionize the financial services sectors in the markets in which it operates should not be underestimated. Let me now discuss the third aspect of strategy for the international deployment of our payment technologies. We are continuously analyzed the base go-to-market strategy for international UEPS/EMV opportunities. As you are aware, last year we decided to create a joint venture based in London and driven by season payment industry executives. Given the time and effort to build the pipeline of active and realizable project, we now believe that being based in a first-world environment significantly extends the potential time to market. Therefore, to remain proactive, to approach these opportunities, we believe we will be better served by working with people who are on the ground and already have partners and customers in specific emerging countries. To that effect, we have identified the provider of mobile payment solutions across multiple African countries, who is keen to expand their offerings in those markets, including card-based solutions, utilizing UEPS/EMV. We will provide more details on this effort as soon as we are able to finalize matters with our proposed partner. Turning to KSNET. The regulatory headwinds on our South Korean subsidiary and the resulting effect on our results, they have yielded many questions from our investors over the past year. I'm pleased to say that borrowing any further regulatory changes, we feel the worst is behind us as our EBITDA margins bottoms out in Q3 at around 16% and rebounded nicely to 20% in Q4. Revenues, driven mostly by transaction volumes, are also becoming -- beginning to recover as seen in Q3 and Q4, being relatively flat in local currency versus the prior year periods after several quarters of declines. The loss of the current pricing changes in South Korea took place in October 2017 and therefore, comparisons should get a little easier starting in Q2. It's this steady revenue and margin improvement that will move us back towards our previously stated goal of returning to our $40 million plus per year EBITDA run rate by fiscal 2020. We will also intend to invest in some expert advice to help us better navigate the opportunities and challenges presented by those new transaction processing landscape as well as to help us assist and explore our strategic alternatives with this valuable asset. Before I hand over to Alex, I want to comment on our investment portfolio, which I believe warrants meaningful attention by our current and potential shareholders. It is clearly undervalued by the investor community as it now represents almost 70% of our total market value despite minimal contribution to our overall EBITDA and fundamental earnings per share results. Cell C, Finbond, Bank Frick, MobiKwik and OneFi are all doing very well as seen in some metrics in our press release. We expect exciting corporate finance activities in most of these investment companies as they seek to expand their activities and optimize their capital structures, which in turn brings us to the topic of our own capital allocation. In fiscal 2018, we spend $291 million on new strategic investments, with each of these fitting nicely into our long-term strategy of A, reaching our full potential in South Africa and B, diversifying globally. In fiscal 2019, we may engage in a few small strategic investments. However, at current levels, we actually see great value in our own shares. We currently have approximately $76 million remaining on our existing share repurchase program, but we are restricted from using our current cash surplus and South African cash flows until we pay down our outstanding loans of approximately $50 million in full. Once our loans are repaid or if we find liquidity elsewhere, we will be in a position to consider opportunistically resuming our share repurchase program. To sustain our commitment to engage with our shareholders, we look forward to meeting some of you in the U.S. next month. The steps and actions we have taken to drive the new Net 1 are meaningful, and we expect to deliver tangible benefits of our strategy starting in fiscal 2019, which as I have said, but will reiterate is our transition year and also one that is likely to be the bottom of our earnings generation. We have positioned the company to navigate through the short-term challenges of exiting our contract with SASSA and positioned our South African business to drive increases in our financial inclusion businesses. While internationally, the restructuring and repositioning of IPG is expected to continue to sustain its recent growth trajectory. With our execution, we hope to rebuild the confidence and credibility in our business and strategy and return Net 1 to the echelon of leading international growth companies. Alex will now go over the financial performance and metrics in more detail before we will open up the session for Q&A.

Thank you, Herman. I will discuss the key results and trends within our operating segments for the fourth quarter of 2018 compared to a year ago. For Q4 of 2018, our average rand dollar exchange rate was ZAR 11.45 compared to ZAR 13.19 a year ago but positively impacted our U.S. dollar results by approximately 13%. Revenue of $149 million in Q4 2018 was down 4% year-over-year in dollars and down 16% in constant currency. Our fundamental earnings per share decreased by 48% relative to Q4 2017 on a constant-currency basis and include a tax-affected USD 0.07 decrease in the fair value of our Cell C investment. Excluding the fair value adjustment, fundamental earnings per share was $0.29 in the fourth quarter of 2018. As indicated in the last quarter, we've included this amount 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. And for fiscal 2019, it will be included in our GAAP earnings due to deduction of new accounting guidance. The decline in value in the quarter reflected in this adjustment is caused by lower market multiples and the peer group, partially offset by the underlying improvement in operating performance of Cell C as reflected in their results announcement last week. We are pleased with the progress evident in Cell C's recently announced results for the 6 months ended June 30, 2018, which showed revenue and subscriber growth and continued improvements in profitability. While there has been some speculation around the need for additional funding in Cell C since their results last week, Cell C has made good progress with a ZAR 1.4 billion facility approved in July and is in discussions for a funding round of a similar size, which is expected to be sufficient for that current requirement. It was always the intention for Cell C to invest in that business following its recapitalization last year, and its leverage ratios remain very manageable. We are confident in management's ability to deliver on the business plan and planning around a potential IPO in 2020 is underway. Our quarterly results were also adversely impacted by a noncash remeasurement loss of $5 million, resulting from the acquisition of DNI on June 30, 2018. In short, we have performed preliminary purchase price allocation as of the acquisition date and as the fair value of our 49% holding was lower than the carrying value of this holding as a result of the equity income earned, we were required to record a measurement loss. By segment, South African transaction processing reported revenue of $64 million in the fourth quarter of 2018, down 6% compared to the fourth quarter of 2017 in U.S. dollars and 18% lower on a constant-currency basis. The decrease in the segment revenue was primarily due to a significant decline in the number of social welfare grants, which have currently being billed at the old contract rate as the Constitutional Court is not yet issued an order on national treasury's price recommendation. For our contractor requirements for cash disbursement of grants at pay points, the Constitutional Court allowed us to engage with national treasury to renegotiate the monthly price, given cash distribution in rural areas has a significantly higher cost structure estimated by the expert panel and quoted by the South African post office to be in excess of ZAR 50 per month. While treasury did propose an increase to ZAR 44.35, excluding VAT to the Constitutional Court, the court has not efficiently accepted this recommendation and therefore, we have only recognized revenue at our old contract price of ZAR 14.42 ex that resulting in a considerable loss for CPS during the quarter. Without rectifying the price increase or instituting a fixed monthly price, given the aggressive migration of beneficiaries to the South African post office, we expect the losses to be incurred by CPS in the first quarter of the fiscal 2019 to increase further. We've filed an urgent application with the Constitutional Court on the 21st of August and any inaction on their part severely prejudices CPS. The resulting segment revenue decline was partially offset by higher EPE-related transaction revenue and increased intersegment transition processing activities. Operating income decreased, primarily as a result of the CPS revenues, you discussed earlier. Our segment operating income margin for the fourth quarter of 2018 and 2017 was 6.7% and 21.9%, respectively. Given our limited visibility, as we await the order from the Constitutional Court, we currently expect our South African transaction processing segment margins to remain these depressed levels for the first quarter of fiscal 2019, coinciding with the end of the SASSA contract. Once we've concluded the contract, we expect to see margins recover as we can rationalize the CPS cost structure, given that we will no longer be required to maintain the full infrastructure as currently required by our SASSA contract. International transaction processing generated revenue $43.6 million in the fourth quarter of 2018, which was down 3% compared to the fourth quarter of 2017, due to a lower dollar-based contribution from the International Payments Group. Operating income during the fourth quarter of 2018 was higher than the fourth quarter of 2017 because last year's results included a $3.8 million allowance for doubtful finance loan receivable. Excluding this allowance, fourth quarter 2018 is lower than the comparative period and was adversely impacted by lower operating income generated in South Korea as a result of the regulations governing the fees that may be charged on card transactions and a lower contribution from the other international businesses, as we restructured various units to consolidate them under the International Payments Group. Operating income margin for the fourth quarter of 2018 and 2017 was 4.8% and 4.5%, respectively. KSNET revenues have been broadly flat compared to the prior year in Korean Won over the last 2 quarters and amounted to $39.5 million in the fourth quarter of 2018, while the EBITDA margin declined to 20% compared to 29% in the equivalent quarter last year, though it did improve sequentially from 16% in the third quarter of 2018. This year-over-year reduction was due to the changes in the Korean regulations, as discussed earlier. We expect this impact to continue to have an adverse effect on reported results for the remainder of calendar 2018. But on a sequential basis, the businesses quarterly results have shown trends turning around. Looking forward, we expect the operating performance to improve in calendar 2019, although the regulatory landscape remains challenging for the VAN companies in South Korea. CapEx in the fourth quarter of 2018 is returned to the lower level seen in the first half of fiscal 2018. And as a result, we are seeing a strong free cash flow generation out of the business. The International Payments Group had a challenging fourth quarter with transaction volumes dropping off from the higher levels we experienced in the third quarter of fiscal 2018. In particular, the third quarter pick up we had seen in the cryptocurrency processing dissipated given the decline in value of most of these currencies as well as the elimination of working capital finance revenue, which seized in the second quarter of 2018. IPG has also been focused on restructuring its various operations, incurring some costs in this regard, which impacted the margins for the quarter. Our financial inclusion and applied technology segment revenue was $53.9 million in the fourth quarter of 2018, down 4% compared with the fourth quarter of 2017 in U.S. dollar terms and down 17% on a constant-currency basis. Financial inclusion and applied technology revenue and operating income decreased primarily due to fewer prepaid airtime and other value-added services, lower volumes in our lending business as we tightened lending criteria and fewer intersegment revenues, partially offset by growth in insurance products and monthly account fees charged to our customers. Our gross lending book, comprising of capital out and deferred service fees at the end of the fourth quarter of 2018 was approximately ZAR 1.1 billion compared to ZAR 942 million at the end of the fourth quarter in fiscal 2017. We have not grown the lending book sequentially during the fourth quarter of 2018 as we further refined tightened our lending criteria to manage our credit risk, given new risks introduced by the current transition in the grant payment space. We continue to believe our financial service offerings will sustain this segment's growth along with the expansion of our branch and ATM infrastructures, particularly once the transition after the grant payment contract is complete. At July 31, we had approximately 3 million EPE accounts, although only 2.5 million are currently receiving grants. Our life insurance business, Smart Life, continues to sustain its momentum, and we have sold more than 533,000 policies at the end of July, making us the largest insurance provider to this market segment. In the short term, Smart Life and Moneyline may be adversely affected by the disruption associated with the transition of the grant beneficiary payment methods, but we expect this to dissipate after the end of September. Operating income margin for the financial inclusion and applied technologies segment was 25.5% in the last quarter of 2018 compared with 25.7% in the fourth quarter of 2017. And as margin reduced due to a decrease in intersegment revenues and inflationary cost pressures, partially offset by fewer low-margin prepaid product sales and the higher monthly account fee income. The operating margin in this segment will continue to be affected by the relative contributions of the various businesses in this segment and the adoption rates of our various financial services products. And we'll include DNI's operating performance from July 1, 2018. We expect DNI's inclusion to be accretive to segment margins going forward. Our corporate expenses have decreased, primarily due to fewer transaction costs and lower intangible asset amortization during the last quarter of 2018. In addition, that quarter includes a $4.6 million noncash loss on the remeasurement of DNI on consolidation, while the last quarter of 2017 included the costs associated with the separation of our former Chief Executive Officer from us, comprising an $8 million separation payment and a $1.6 million stock-based compensation charge. We will commence amortizing DNI acquisition-related intangibles in the first quarter of fiscal 2019 and as a result, we expect our operating income to include an expense of approximately ZAR 37.5 million or $3 million using our fiscal 2018 exchange rate each quarter. Our fourth quarter 2018 net interest income decreased to $0.9 million with higher interest expenses, driven primarily as a result of the South African facility we obtained to partially fund our investment in Cell C and DNI and lower overall cash balances. This was somewhat offset by higher interest income reported due to interest recorded from a listed note. We recognized earnings from equity-accounted investments of $4.3 million during the last quarter of 2018 compared to $1.9 million in the same period last year. DNI and Bank Frick contributed for the full quarter, and we also recorded a $2.6 million increase from Finbond as it continues to expand its operations in North America. The Bank Frick positive operational contribution for the quarter was offset by a GAAP adjustment to reverse the effect of a capital contribution that they booked an income under local GAAP. We expect Bank Frick to provide a positive contribution to equity earnings going forward. As we now control DNI, it's contribution to our fiscal 2019 earnings, and we recognize via consolidation instead of through the equity method. Capital expenditures for the last quarter of 2018 and 2017 were $1.9 million and $2.7 million, respectively and a decrease due to the acquisition of fewer payment processing terminals in Korea, partially offset by an increase in ATM and vehicle acquisitions in South Africa. We expect our fiscal 2019 capital expenditures to be higher than in 2018, as we expand our ATM and other payment infrastructure in South Africa. At June 30, 2018, our cash and cash equivalents were $90.1 million, 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 totaling $291.5 million. Scheduled repayments of our South African long-term debt, unscheduled repayments of our Korean debt in full, the repayment of our short-term facilities, some growth in our South African lending book and capital expenditures were partially offset by cash generated by our core businesses and new South African long-term facilities. 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 2019 to be used to repay principal and interest under our South African lending facilities to fund our internal growth investments and to the extent possible, to reinitiate our share buyback program. As of June 30, 2018, we had outstanding long-term debt of ZAR 683 million or $50 million under our South African facilities. We expect to make 4 equal principal repayments of ZAR 151 million during fiscal 2019 and the remainder of our debt will be settled in full in early fiscal 2020. Our fourth quarter 2018 tax expense was $10.1 million compared to $10.2 million in 2017. Our effective tax rate for fiscal 2018 was 92% and was much higher than the South African statutory rate as a result of the losses incurred at CPS, DNI remeasurement loss, a small impairment loss, nondeductible expenses, including transaction-related expenditure and nondeductible interest in our South African long-term facility. We expect our effective rate for 2019 to be approximately 35%. I'd like to highlight that our 2018 effective tax rate of 61% has been adversely impacted by a number of noncash events, including a $20 million impairment loss, the $5 million DNI remeasurement loss and the $8 million allowance for doubtful finance loan receivable. Excluding these items, our effective rate would be approximately 40%. Our weighted share count for the fourth quarter of 2018 was 56.8 million versus our actual March 31 share count of 56.7 million shares. Compared with the fourth quarter of 2017, our weighted share count was lower due to the repurchase of 1.3 million shares in the middle of Q4 2017. Turning to our guidance. Given the volatility of the SASSA transition process during the first quarter of 2019, we believe it is prudent to issue guidance focusing on our more predictable profit contributors. For fiscal 2019, therefore, we expect fundamental earnings per share of $1.05 per share, which is based on the following assumptions and comments. Low contribution into net income from CPS in 2019. We expect the number of active EPE accounts to be around 2.5 million on average for the year and ARPU on those accounts to be flat with the last year. We have previously indicated long-term goal of 5 million EPE accounts in the next 18 months, but we feel the current confusion caused by SASSA and SAPO warrants conservatism for now with updates quarterly. South Korea full year results, we expect to be consistent with fiscal 2018 although we should see improvements in the second half of the fiscal year. With respect to DNI, we expect results reflecting 10% growth in fiscal 2019, although we see significant potential synergies with our other businesses. And our guidance has been prepared on the basis of a constant currency base of ZAR 12.70 for the $1, 56.8 million shares and a tax rate of approximately 35%. Additionally, we would like to highlight that there are various events that could transpire, which could -- would cause us to positively review our current guidance. These include, but are not limited to one, we expect to be paid for the service provided under our SASSA contract through September 30, 2018, but CPS is currently operating at a loss. Constructive dialogue with the key players regarding pricing for the first quarter of 2019 were performed would have a positive impact on the 2019 results. Two, our EPE account guidance reflects the current uncertainty and unilateral actions undertaken by SASSA through their transition process to reduce the number of net EPE accounts through the end of September, following which we would expect a more normalized competitive environment to exist. For every 0.5 million EPE accounts, we retain over our guidance, we expect to see between $0.03 and $0.05 incremental EPS benefit. Our target of 5 million-plus EPE accounts in 18 months has not changed due to the factors we've outlined earlier it means pushing our target data out by 3 months. Also worth noting is in fiscal 2019, we expect our initiatives with Cell C and DNI to also result in the addition of new higher income customers to our EPE offering. And lastly, given fiscal 2019 is likely to be our biggest transition year in the company's history, we expect this fiscal year to be the bottom and all our various initiatives, investments and actions to drive long-term growth of this space. We can now open up the call for Q&A.

[Operator Instructions] Our first question is from Allen Klee of Maxim Group.

Good morning. Some questions on SASSA and EPE. Can you quantify the CPS loss in the quarter? And then when the contract ends the ability to reallocate that infrastructure could - can that create a positive earnings from that? And then also on the - you're getting underpaid given that you’re processing the most expensive people now, a timing for when you might hear about getting higher rates for that? And then on the customers that sounded like they were at risk, it sounded like you mentioned 800,000 and 900,000 of EPE customers that, maybe talk about what you can do proactively to try to mitigate the potential churn of those customers? Thank you so much. Herman Kotzé: Thanks, Alan. I think I've got a list of your questions, but please remind me, if I have skipped up on some of them. In terms of the CPS loss, we don't split out those numbers. They are subject to a final review, and they, obviously, need to be provided to the court at the end of the contract period. So as soon as that is done, we will publish the results of exactly what the losses were. We expect it to continue. On your timing question, we do not know exactly when the court will provide us with response. We have filed an urgent application to the court. We've also addressed some correspondents to the Chief Justice to ask them to please provide us with guidance in this matter. As far as we understand, considering that we do have the recommendation from National Treasury, it's simply a matter of the court agreeing and approving the recommendation that was made. But as the highest court in the land, there is no set time in terms of how these kind of applications are being heard. Second, just talking about the return or the reapplication of the assets that we deployed as part of this contract, these form part of what I spoke about when we said that we are -- we've already enabled these vehicles to become fully interoperable with the banking system. And so it is our intention to reutilize to the extent that we can, considering that a lot of these vehicles are now 6.5 years old. But specifically, the technology that we've deployed on these vehicles in the form of the cash dispensers and the biometric readers, those will certainly be deployed - redeployed as part of the EasyPay Everywhere initiative and they will form an important part of our acquiring strategy, which will allow basically any South African with any bank card to access the network. So in terms of our mission to provide last mile access to the population that is not dependent on the users of the system being Net 1 customers. They can be customers from any one of the banks. And so we hope to maximize the use of that infrastructure. Turning to the customers at risk, we spoke about the 800,000-odd EasyPay Everywhere customers that will receive the grants for September into different accounts. And then there are -- separate to that we've got 700,000 people with the old cards, who apparently will also receive big, big money in a new SASSA or SAPO account, which they would first have to activate and be issued with the card. From our point of view, we believe that some of these actions are contrary to what the regulations and the relevant banking acts and rules state. And as a result, we will be taking the necessary legal action to ensure that those regulations are not contravened on an urgent basis. But in order to alleviate the potential crisis that these cardholders will face, we are proactively trying to advise them that there may be a problem by sending them messages and SMSs. We also published the press statement or the media statement that went out yesterday, and we will be fully manned in terms of our call centers, in terms of our advisers and helpers on the ground, when the payment cycle starts on Saturday.

Okay. And then in terms of Cell C, with DNI, can you talk a little about, if you think that Cell C will - based on the what you can generate from SIM cards and commissions on the cellular plans, how you think about if this can be accretive in fiscal '19? And do you still feel comfortable that Cell C plus DNI providing around 25% to 50% EPS in fiscal '20? Herman Kotzé: We are very confident of the ability between our distribution network and technologies combined with those of DNI and Cell C that it will be a meaningful contributor in the fiscal 2019 year. For us the big game changer, I guess, for the three of us together has really been the dollar-sharing initiative that Cell C has signed, which opens up its reach across virtually the entire country. It improves the signal coverage or the customer experience if I can put it that way from a 50% geographical cover, which previously was mainly in the urban centers to more than 80% on a national basis. And so a huge part of the rural side of South Africa will now also be adequately covered. That is obviously where a lot of our customers reside and a lot of our EPE clients reside. And so with the ability to now provide them with a reliable cellular and data service as well as the low-cost bank accounts, low-cost credits and low-cost insurance products, we're very bullish about the prospects of this particular side of our business and our strategy. We foresee significant growth in terms of revenues, the uptick in users. We also now have the ability to target a slightly different segment of customer than what we had before. So from that point of view, we are extremely bullish. If we talk about the other synergies that have been identified as a result of the acquisition of the majority stake in DNI and our minority investment in Cell C, we certainly have the ability to provide Cell C with the SIM card requirements, and we've done so over the last two quarters, almost on an exclusive basis. So that's been very good for us, and we expect that to continue and as we believe we provide them with a very competitive product and service. And in terms of just being able to distribute in terms of telephony and communication-based products and services, when we talk about normal airtime, we talk about data and we talk about content delivered through cell phones and tablets. We believe that there is an enormous potential in an underserved market. Those customers today are ours in some way or form either by being banked through us or having one or more of our other financial services. And so by bringing all of these together, the upside is enormous.

Okay. Thank you. And then for KSNET, can you talk a little about the competitive environment? And what turns this business eventually back to growth? Herman Kotzé: Sure. Korea is a highly competitive environment. South Korea is a country that is highly serviced in the financial services industry and in the transaction processing industry by a number of players. In our side of the business being primarily transaction processing and value-added network provision, there are two other major competitors and a variety of smaller ones. I would say, they are probably between 10 and 15 of these value added networks in totality. But it is really an industry dominated by the top 4 players of which KSNET is one. And the competitive environment, I think, has been hugely influenced by the introduction of these capped rates by the government on the one hand. So we - before we could compete just on a pricing basis, we are now slightly hamstrung by the fact that there is a cap that's been put on what can be charged on the one hand. On the other hand, there are also certain regulations that have been introduced that prevents the then companies from engaging in promotional activities. As an example, in the past, we were able to provide the point-of-sale devices free of charge to our customers. That -- those kind of initiatives have now also been stopped by the government. So that's also really removed an element of how we could differentiate ourselves. The key for us right now is to absorb the losses that -- or the reduction, rather in the issuing and the acquiring fees. The immediate way for us to fix that is, if your fees go down by 40%, you have to increase your volumes by 40% in order to regain what you have lost. So there is a big focus on volume. The other unique element in the Korean space that does differentiate the various VAN companies from each other is the extent to which they utilize agents. And so agents are normally utilized by companies such as KSNET to service the smaller SME merchants in the more rural areas. And there is an element of -- during which time frame and to what extent any cut in the fees that we receive from the card issuers can be passed along to the agents. Agents are -- I would call them free agents. They are pretty -- it's pretty easy for them to switch between the various VAN companies. And so the extent to which you can push down any fee cut or also have quite a significant impact on the profitability of the individual businesses. In our case, KSNET is uniquely positioned as the largest provider to the small- and medium-enterprise sector of the Korean market. Whereas, our other competitors are a lot more focused on the larger retailers. And so we believe that's where our competitive edge lies and that's where we need to improve the volumes. Finally, I will just say that the cut in the fees has obviously had a much more material impact on the smaller VAN companies than it's had on the bigger ones. Obviously, for us, it's been a very painful experience, frankly. But for some of the smaller players, it's been catastrophic. And so we're seeing that a lot of those are effectively closing shop and as a result, those volumes are obviously available to the surviving players in the Korean market.

[Operator Instructions] Our next question is from Tom Zeifang of Lucrum.

Hello, guys. Can you give us a little more granularity on the CPS losses in Q4 and going forward in Q1? Herman Kotzé: Tom, we are - at this point in time, we're in the process of finalizing the submissions that we have to make to the court in terms of the overall financial performance of CPS over the 6-month extension period. So until that's finalized, we don't want to elaborate too much on it. Safe to say that in the absence of our ability to charge a fair fee, I think the mathematics -- broad mathematics are pretty simple to quantify. We are at the moment still charging under the old rate, which is ZAR 14.42 per payment. The only differentiator between the last quarter and the first, let me say Q4 and Q3 is that we used to charge this rate on roughly 10.8 million grant recipients, whereas, we are now only allowed to charge the rate on the actual number of people paid at cash pay points. That number has obviously declined steadily as the phaseout process happens. And I would say for Q4, we probably paid an average of 1.8 million to 1.9 beneficiaries as opposed to the 10.8 million. So overall, about a 9 million reduction if you multiply that by the ZAR 14.42, it gives you an indication of the reduction in our revenue. We've obviously tried to reduce our cost base accordingly, but I would say as a broad measure, we've probably run at a loss of around ZAR 60 million a month over the last quarter.

ZAR 60 million a month over the last quarter? And it gets larger in Q... Herman Kotzé: Yes.

Yes. And it gets larger in Q1. Herman Kotzé: It gets larger in Q1 to the extent that the beneficiary base reduces, that's correct. But that may obviously be offset partially or in totality, once we get the pricing finalized for the last 3 months of the contract period.

Okay. Can I ask a housekeeping question too? You mentioned ZAR 3 million a quarter for expenses, which by my math is ZAR 0.20, ZAR 0.23, what exactly is that for? Herman Kotzé: I think that -- are you talking about the head office expenses?

Herman, I think, I can get that. Tom, I think it's ZAR 3 million -- $3 million in amortization for the DNI acquisition.

But it wasn't compensation for our legacy employee?

No. Herman Kotzé: No.

Okay. I’ll get back in queue, Thank you.

We have a follow-up from Allen Klee of Maxim Group.

Yes. For other international areas, can you talk about, as you're consolidating it, what the potential longer term could be from a revenue and earnings perspective? And then similarly with MobiKwik, as you potentially rollout the mobile wallets to their base what the potential there could be? Thank you. Herman Kotzé: Dhruv, do you want to just handle the MobiKwik part of it first?

Sure. So Allen, on MobiKwik, obviously, we are in the first innings here of rolling out our products. We're only 4 months in. And as we've mentioned on previous calls in India, the key to generating revenues particularly when you're reporting in dollars is you need to get to significant volume. So even though we've seen good and great initial growth, and we've got a pipeline of new products in there, I mean, if you look at the value processed in the last quarter were still $3 million. So we still have a ways to go before we can start quantifying the financial impact of our products in here. But giving ourselves the best shot by: A, ramping up the ones we have; and B, introducing more to keep driving that volume up. Herman Kotzé: Thanks, Dhruv. And just, Allen, on the IPG side, I think it's important that as soon as we've got our two flagship, while three flagship development certified, being our multicurrency issuing and acquiring platforms as well as our instant onboarding platform, those are all effectively completed. We await certification from mainly Visa and MasterCard to commence with the marketing and the rollout of that. In broad terms, and we just gone through a significant strategic planning session over the last month or so finalizing the group strategic direction. We have set ourselves in IPG, a target of growing that business at least by a factor of 10x in terms of its top line and bottom line contribution over the next 3 years. Ladies and gentlemen, that's all we have time for today. Thank you very much for joining us. You may now disconnect your lines.