Good day, ladies and gentlemen, and welcome to the Net1 UEPS First Quarter 2014 Results. [Operator Instructions] Please also note that this conference is being recorded. I would now like to hand the conference over to Dhruv Chopra. Please go ahead, sir.

Thank you, Dylan. Welcome to our First Quarter Fiscal 2014 Earnings Call. With me today are Dr. Serge Belamant, our Chairman and CEO; and Herman Kotze, our CFO. Both our press release and Form 10-Q are available on our website at www.net1.com. As a reminder, during this call, we will be making certain forward-looking statements, and I ask you to look at the cautionary language contained in our press release and Form 10-Q regarding the risks and uncertainties associated with forward-looking statements. In addition, during this call, we will be using certain non-GAAP financial measures, and we have provided a reconciliation of these non-GAAP measures to the most directly comparable GAAP measures. We will discuss our results in South African rand, which is a non-GAAP measure. We analyze our results of operations in our 10-Q and in our press release in rand, to assist investors in understanding the underlying trends of our business. As you know, the company's results can be significantly affected by currency fluctuations between the U.S. dollar and the South African rand. As was the case last quarter, we will be making limited comments regarding the government investigations, but we will not be taking any questions on the subject. And with that, let me turn the call over to Serge.

Thank you, Dhruv. Good morning to all of our shareholders. I'm very pleased with our quarter 1 2014 results, but specifically about the progress we have made towards the execution of our overall strategy. I'm particularly pleased that we have been able to reach an agreement on terms for a new BEE transaction, which we believe will lay the foundation to our company's sustainable growth in South Africa, specifically. For quarter 1 2014, we reported revenue of $123 million, which is a year-over-year increase of 34% in constant currency. Fundamental EPS in the quarter was USD 0.37, an increase of 77% in constant currency. Our core established businesses, which include, of course, CPS, KSNET, EasyPay, together in Q1 2014 accounting for approximately 75% of our revenue. Q1 was our first quarter in which there were no expenses related to the registration portion of our SASSA contract, and during this quarter, we began focusing on both our complementary and supplementary growth areas. As we highlighted last quarter, there were roughly 292,000 beneficiaries who did not present themselves for reregistration, and therefore had their grant is suspended by SASSA in September 2013. We actually expect that more beneficiaries will be removed from the payment file, in time, as our IT systems continue to identify areas of fraud and corruption. We did not, however, believe that over time the number of grant recipients will decrease as the savings achieved by SASSA will be redeployed into the Social Security arena, and more beneficiaries will be targeted to provide them with some form of financial assistance. As established, our UEPS technology is 100% EMV compliant, but amongst other functionality allows beneficiary to be biometrically verified, which is a worldwide, as you know, innovation. On our real time authorization systems, specifically South Africa, at peak times,…

Thank you, Serge. As usual, I will discuss the key results and trends of our significant operating segments for the first quarter of 2014 compared to a year ago. I will also discuss, to the extent possible, the outlook for our business in fiscal 2014. For Q1 of 2014, our average rand dollar exchange rate was ZAR 10 to the USD 1 compared to ZAR 8.26 a year ago, and negatively impacted our U.S. dollar based results by approximately 21%. On a consolidated basis, for the first quarter of 2014, we reported revenue of $123 million, an increase of 34% in constant currency. We reported fundamental earnings per share of USD 0.37, which grew by 77% in rand compared to a year ago. Q1 2014 results do not include direct implementation and significant smart card costs because we substantially completed our SASSA implementation in Q4 2013. Our Q1 2013 results included direct implementation costs, including smart cards of approximately $16 million. We measure the group's profitability by analyzing the operating income and margin of our business segments. Our South African transaction-based activity segment posted revenue of $63 million during Q1 2014, 24% higher in local currency, driven primarily by more low margin transaction fees generated from beneficiaries using the South African National Payment System and incremental mobile airtime sales driven by the rollout of our Umoya Manje product. Our segment operating margin, excluding amortization of intangibles, improved to 22% from 13% last year, primarily due to the elimination of direct implementation costs. CPS volumes were flat year-over-year due to SASSA's suspension of former grant recipient cardholders who had not presented themselves for enrollment during the first quarter of fiscal 2014. These grant recipient cardholders will have to apply for restoration of the grant and present themselves for enrollments should they…

[Operator Instructions] Our first question comes from David Koning of Baird. David J. Koning - Robert W. Baird & Co. Incorporated, Research Division: I guess my first question is just, the core South African business is doing outstanding now, growing 24% constant currency off of a tough comparison. I mean, I guess, is the SASSA revenue flattish year-over-year? I know by last year already you had most of the recipients on. And I'm just wondering, if that part is just stable year-over-year, it means of the rest of that business is probably growing 50%. And so, I'm just wondering, maybe you can kind of disaggregate how the SASSA business is doing, how the rest of the businesses are doing. And then I guess the second part of it all is, you said there was a margin dilutive impact from some of the mobile ramp, yet the margins were extremely strong. And maybe you can just talk about how margins kind of go from here too.

All right. Let me kick off, and then Herman will get into the detail. I think we had mentioned long time until -- well, long time ago that our fundamental strategy was to obviously, with the SASSA contract, to be able to create an infrastructure that was going to deliver to us approximately 10 million clients. And on top of that, of course, we could then build around that 10 million client base by utilizing the same infrastructure. In other words, at very little cost to actually perhaps attract another couple of million clients that were more financially, for lack of a better word, financially active. Now the next step has been done. The plan was, of course, not to rely long-term in terms of the growth of the SASSA contract, because we knew that over the next 5 years, the SASSA contract was going to remain flattish for 2 reasons. One, we knew that the price was going to remain the same. And two, we knew that the expenses were going to go up because we have to keep on giving salary increases to our people on a yearly basis. So we knew that, that might be offset by new customers coming into SASSA, but we assumed that, that would remain neutral over time. So the growth of the business was never built on growing the SASSA revenue, it was built on growing the product range around, first and foremost, the SASSA customer base. And two, the new customers that we're going to be able to drain our, for lack of a better word, our businesses, and simply because we were now in areas where there was no service available. And this is what we've started to see in, I think, the end of the last quarter and the beginning of -- and definitely this quarter, whereby our financial services, primarily, have grown exponentially, and you are quite right that, that, of course, shows a much greater growth than simply 24%. Our new mobile service candidly has surpassed any of our expectation because we were not expecting to pick up that number of clients, we're talking about millions of clients in the 3 to 4 months period. And our new services that we have just launched only 2 weeks ago already have reflected another 350,000 or 400,000 new clients that are generating massive amounts of transactions. So that's where we are seeing as the real growth of the business is what I call the complementary or supplementary products that we can build on top of the infrastructure that we have built, that we can now start utilizing at marginal costs, and of course, to utilize that same infrastructure to service the 10 million clients we have, and at the same time, to start delivering products to new clients. I think, Herman, if you want to add a little bit more to that.

Yes. And, Dave, I think from -- analyzing from margins in the business, there are couple of factors that have contributed to the solid base that we've seen in Q1. One of them of course is that we've seen a continued trend of our cardholders in terms of them also utilizing a broader base of channels to access their grants, so some of them utilized the ATM network on an increasing basis now. A lot of them utilized the merchant acquiring network that we have in place, to access their grants, and of course, that results in additional revenues to us in accordance with the interchange fees as they have been set by the national payment system. On the other end, we've also got the impact of the mobile airtime transactions, where it's different kettle of fish in terms of the volume, which, obviously, is quite high. The accounting treatment for the prepaid airtime sales obviously takes the full voucher value into account as revenue. The profit effectively is the margin that we make from the operators through the distribution of the airtime. And of course, because we're using a very efficient channel in the distribution of the airtime being through mobile, rather than the traditional sort of fixed infrastructure-based models, the margin on our airtime sale product is also much better than it would be if we looked at what's traditionally happened, for example, in EasyPay, where that distribution has been the traditional way. So overall, I think that's really set the basis for the solid increase in the margins. Of course, if we look at what happened in the past year, and whether we do the comparison sequentially, or if we look at Q1 last year compared to Q1 this year, there were obviously a number of expenses…

I think it's -- obviously, it's an excellent question. And there's 2 -- again, from a strategic point of view, there's 2 things that I'm trying to drive here. One, either we have to capitalize on what we've done in the base, and you are quite right, there are some opportunities in that field alone that can become, if not an equal to the current revenue we get from CPS, certainly can actually climb up to be at least as good as a 50% to 60% of the actual revenue that we make out of CPS today. And financial services is obviously one of them, and there's no doubt that mobile is another one. So I think you've identified those 2. However, those 2 are very much related and associated with one, the SASSA tender, and two, the infrastructure that goes with it. Part of our strategy is obviously to diversify that risk. We are -- we believe that there will be 2 other areas of business that we really believe must and should grow outside of the South African context. One, we talked about before, which is our Association with MasterCard and the potential of that association. And it's too early to say, but so far, I'm almost getting excited about some of what I've heard through my business development team, simply because it's starting to take quite a bit of their time, for lack of a better word, and I'm starting to get involved in terms of looking at contracts and looking at agreements and looking at fee structures, which means -- and looking at the size of these opportunities. And the size of this opportunity is, in my view, gigantic, it's multiple times that of the size of 10 million cards of SASSA. So that, to me,…

And Dave, if I can add to that. Obviously, from our perspective, adding a product rapidly, an extra product or a business that equals 10% of revenue, as we expect it to be for the full year, is one matter. It's probably easier for us to add a product line or a business that will be an extra 10% of operating profit, because 10% of the smaller number is a smaller number. But I think that's probably also the way we need to look at this. That some of the opportunities that we are pursuing, the focus is obviously for us to maximize the margins on those business. Although they may be small in terms of the transaction values, which means that we would need enormous volumes for it to make a big impact on the top line, we certainly think that a lot of the businesses that we are working on at the moment, including the ones that you identified, specifically the financial services and the airtime product, that those can rapidly contribute in excess of 10% of the operating margin of the business as it stands at the moment.

Our next question comes from Kevin Tracey of Oberon Asset Management.

I wanted to ask a few about the financial services business. And I guess the first being is, here, we have read a number of things that have described behavior that seems to be quite aggressive among both lenders and borrowers in South Africa, including things like falsifying information on account applications and so on. And this has all led to quite quick unsecured lending growth in South Africa, and the situation sounds a lot -- sounds familiar to what we experienced here in the years that led up to our financial crisis. And I guess I'm just curious if you could talk a little bit about your procedures to manage credit risk, and how UEPS will prevent the losses that we have seen at places like African bank and other unsecured lenders in South Africa?

Once again, that's obviously an excellent question. Again, our philosophy on loans, specifically to the poorer population, is not quite the same as I think a lot of what we refer to here as micro lenders. We not -- we don't believe that if possible poorer people should actually have loaned at all, simply because they probably can't afford them. But we've also realized that it is unfortunately a matter of survival for many of them to actually have loans. So it's one of these battles to actually say, well how do we go about ensuring that the people that really need loans, and let's put in inverted commas, for the right reasons, can have access to these loans and can have access to a loan, whereby they will be able to number one, of course, afford it, and on the other side, do not create a very, very large risk to the company that is actually affording them the loan. Otherwise, as you know yourself, the price would definitely go up if your bad debt ratio is 30% or 40% or 50% like a lot of micro lenders in South Africa today. So what do we do? Well, the first thing we do is that our loans are managed very differently to anyone else, because it is the computer that actually grants loans and not a person, that's a very, very important criteria. So the computer decides if you are qualified for a particular loan, and over what period do you qualify to repay that particular loan in terms of affordability. And we have access to the correct databases to find out if a person can afford it or not. Of course, we also know categorically who took out the loan, because the system is 100% biometrically driven. In…

Okay. I guess I'm surprised to hear the number of less than 3% of bad, I guess, bad debt. It seems to be from the outside looking is, it seems like it would be quite risky lending. And I guess outside of all those explanations you've gave, is there anything that positions you uniquely and that you're distributing these social grant payments that you can allow the user to -- or allow the borrower to apply those grant payments to payoff the loan, and that contributes at all to the, I guess, much lower bad debt ratio that you have compared to some of these other unsecured lenders?

It could be wonderful if we could be in that position. But that could be -- but that is a position we are not in. We are no different in terms of being able to make a deduction or to effect a debit order on behalf of a particular person, compared to anyone else in the actual market. I think it's purely because, one, we have -- I believe we have customer confidence, which I think is very important. I think we have a track record. I think the customers know that we are obviously cheaper than the majority of our competitors. And I think we focus our loans for the right reason. And on our side, we're probably limiting our market by targeting certain people, like I've mentioned. But to be totally honest, we're not really that interested in giving out loans to the general public at large, simply because they want one, depending on they must just decide to go out and do something that in fact, maybe, they should not be doing with it. So we're very, very -- we've narrowed that market down for ourselves in order to be, I believe, helpful, from a social point of view to the poorest, but at the same time, to limit the risks that we will have on our side, and thus, being able to offer a much, much cheaper product than anyone else.

Okay. Understood. And then is there any, I guess, target or expectation about how much capital you plan to put into this business? I think the number was $17 million or so in the balance sheet at the end of September?

I know that Herman can answer the question because we had an audit committee meeting for a couple of hours talking about this. And to be quite honest, we're very excited about the fact that the loan book can grow. But obviously, it is to grow and become something very specific within the organization, and not something that we might have to just separate it from the rest of what we're currently doing. But, Herman, maybe you can qualify that.

Yes. For us, the maximum cap, obviously, will be determined by a number of factors. Firstly, you have to determine at what point do we see a saturation point. We've only really commenced offering this product on a national basis over the last couple of months. So I believe we're still in the firm growth phase, but I think given another couple of quarters, we will see where the demand kind of levels out. In doing so, we're obviously keeping a very close eye on the group's liquidity reserves, and what we have available, both from a cash point of view, as well as our prearranged facilities. And there are specific figures that have been put in place to ensure that we don't fool -- foul off any of our self-imposed sort of limits. And once we get to those limits obviously, on the 1 end, it will be quite a nice problem to have when we get to the point where we need more capital than what we have available to fund this specific business. But again, we already have a specific set of plans where we would be able to house this sort of a special-purpose vehicle and arrange a dedicated line of funding for this specific line of business. And I think again, from our perspective, it should be relatively simple or much simpler to do than most of the other South African lenders who have increasingly gone to longer period loans. So if you look at the big lenders, many of them started out giving 12 month loans as an example, and today the average loan period is 50 or 60 months. We are simply not in that business. Our maximum term of a loan is 6 months. The amount of money that we lend out is really very small in comparison to what other lenders are providing. And so, for us to prove the annuation of our loans and the repayment record on those loans will be a relatively simple exercise. And I think to convince any prospective funder, should we get to that point, will be relatively simple exercise, and hopefully, we'll be able to get that funding at very competitive rates.

Okay. Great. And if I could just have one quick clarification, and I'll pass it on.

Kevin, this Dhruv. Can I just ask you to get back in queue so that we can receive the other questions.

Our next question comes from Russell [indiscernible] of [indiscernible] Holdings.

So the question, I kind like to, or the topic I'd like to get a little bit more into is the VCC. If you could provide a little color update on progress with the largest mobile phone maker in the VCC? And then secondly, if you elaborate a little bit on the VCC opportunities you've discussed in the past in the U.S. and in Africa. In some of that, I think you've noted a couple of different initiatives you have going in the U.S. and Africa with the VCC.

Yes. Excellent. The VCC product, as you know, is not new. We've been trying to find the right formula for the last 2.5 years, more or less. And obviously, it involves, or at least we kicked off, as you know, playing a little bit with the operators, thinking that, that would be the right -- the mobile operators, thinking that this could be the right approach. Unfortunately, I think they want to take everything and didn't leave too much for us on the table. On top of it, of course, as you know, need a bank, which underwrites the -- actually, let's call it a brand, being it a Visa, MasterCard or Chinese UnionPay brand. So we experimented with a few of those models, and we really found that one, we actually don't need the operator at all, and that we can probably get away by being 1 bank that allows us to issue cards -- virtual cards internationally. And we have that bank already in the U.S. that we had entered into an agreement with couple years back with our MetroPCS. So we believe that now the model is probably correct. Now it's all a question of funding the methodology of actually marketing this particular product without spending billions of -- billions and billions of rands or dollars for that matter. And in order to do that, the best is actually to do it through partnership with different entities. Once again, the mobile operators come back into the game, because they're not -- they are interested in actually assisting us to market it. As long as now we do all of the work, we take all of the risk and they just pick up a piece of the action. And that's not necessary a bad model, and we know…

Okay. Obviously that was very helpful. If I can go on to another topic, with XeoHealth in the U.S. If you could just outline the prospects there, and if you can think health care reform in the U.S. plays into XeoHealth's favor.

XeoHealth is a strange animal. As you know, what we've determined is that the big advantage of XeoHealth is twofold, depending which country you're in. The main one, is that they can do real-time, for lack of a better word, analysis and authorizations of claims, according to certain rules as given by the health providers. That's something funnily enough that we understand in the U.S. does not exist. That's all done in a bench mode, it's actually fairly archaic by what I understand. However, to penetrate the U.S. market, one mustn't fool themselves, we might be, for lack of a better word, the big fish in South Africa. But we're nobody in the United States, and that's something we need to understand. So what we've been trying to do is to find a local partner that has got credibility, reputation, the right context, track record, and of course, money, to be able to funding such an initiative. And at the moment, we have not identified that animal yet. So after what you've heard, we've made at this point in time a decision that we are trying -- we are now going to focus and invest our money in the products and the projects that we know we can grow and we can control. We are not going to continue to spend millions of dollars in other projects, which are really non-core to some extent, although show great opportunities, but non-core. So we might actually offload, in fact, MediKredit as a total project, and simply provide technology or the technological solutions that we believe we can provide to somebody that is in healthcare, rather than someone that is in transaction processing, which is us, and is getting into healthcare. Healthcare is a very complex, very, very complex business, for lack of…

Can I just add one quick follow-up. What's the progress against AllPay at this moment, the lawsuit against AllPay in South Africa?

All right. That's -- unfortunately we can't say much more. It's with the Constitutional Court. We are expecting to announce it, if it's what you're looking at. That's on the one end. Hopefully, they'll come back to us quickly. And as you know, we also filed the lawsuit ourselves against AllPay and the number that we are going to be claiming gets bigger and bigger, and we're hoping with a good constitutional proposition, and of course, the finalization of our own 34A investigation in South Africa, whereby we ask for the police to investigate why we were being investigated, and for what reason. We hope that the conclusion of those 2 things will certainly give us the ammunition that we require for a judge in South Africa to actually say, yes, it sounds like if somebody was going offside and need to pay us a little bit of -- in terms of damages.

Our final question comes from Timothy Wojs of Baird. Timothy Wojs - Robert W. Baird & Co. Incorporated, Research Division: I just had a couple of modeling questions. I just want a couple of clarifications. I guess, first on the international business, did you say there was $1 million nonrecurring gain in that line, and I just want to clarify that, that was what I heard?

Tim, that's correct. There was a -- as we're winding up in search of some of the more, sort of unprofitable businesses, we've been terminating certain contracts. And as a result of that, there was a $1 million inflow in Q1, which is probably of a one-off nature. So certainly, modeling that going forward, I would not include that going forward for the rest of fiscal 2014. Timothy Wojs - Robert W. Baird & Co. Incorporated, Research Division: Okay. That makes sense. And then I guess just on the debt charges. Are those going to be -- I think you have mentioned about $1 million of refinancing cost in Q2. Is that going to be in fundamental EPS or are you guys going to back that out?

Well, we normally back that out of fundamental earnings per share. Timothy Wojs - Robert W. Baird & Co. Incorporated, Research Division: Okay. And then just on free cash flow. Historically, you guys have talked about free cash flow maybe being in line with fundamental EPS, and just curious on an update there, and then as you look at the cash balance, how should we think about that going forward as you grow the lending book, but then also as you fund the BEE transaction?

So on the free cash flow, approximating fundamental EPS, that obviously works in an environment where there isn't a business that grows exponentially from one quarter to the next, and consumes a lot of the cash. So if we exclude the impact of the growth in our lending book, I think that free cash flow will still approximate to fundamental earnings per share basis. The very nature of the lending book that we have, because that it's fairly short-term, is that it will become self-funding at some period in time, which hopefully won't be many years from now. Certainly, I would hope that in the next 12 to 48 months, the book becomes self funding. But I think that's important to keep in mind. And in terms of further uses of cash, of course, we'll have to be quite judgmental, it's not the right word, but we'll have to assess all the opportunities that come our way in terms of the use of the surplus cash. From the BEE deal perspective, I think it's important to note that the net results of funding the BEE deal is that there is no cash outflow from the group. So we have a subsidiary company in South Africa that's providing the loan to the BEEs, also gets the repayment on that specific loan, but there's no cash outflow or any impact on the group's cash position by providing the loan to our BEE partners.

Thank you, ladies and gentlemen. On behalf of Net1 UEPS, that concludes this conference. Thank you for joining us. You may now disconnect your lines.