Ladies and gentlemen, good day, and welcome to the Net1 UEPS Technologies Q1 2016 Earnings Call. [Operator Instructions] Please note that this call is being recorded. At this time, I'd like to turn the conference over to Dhruv Chopra, Head of Investor Relations. Please go ahead.

Thank you, Ari. Welcome to our First Quarter Fiscal 2016 Earnings Call. With me on the call 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, www.net1.com. 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 and Form 10-Q regarding the risks and uncertainties associated with forward-looking statements. In addition, during this call, we will be using certain non-GAAP financial measures, and we have provided a reconciliation of these non-GAAP measures to the most directly comparable GAAP measures. We will discuss our results in South African rand, which is a non-GAAP measure. We analyze our results of operations in our 10-Q and our press release in 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. So with that, let me turn the call over to Serge.

Thank you very much, Dhruv. Good morning to all of our shareholders, and good afternoon to others. Our first quarter of 2016 marks a milestone in our company's ability to innovate, but more importantly, to deliver. I have mentioned a number of times that our strategy is based on both attack and defense. Some of you may know or heard of [indiscernible] Chess World Champion during the '60s, who was known for defensive play before he would launch an unstoppable making combination. We have for many years attempted to ensure that we construct fullback plans before we spearhead any new business development. We have been successful in implementing this strategy and our business has been able to morph when we require to counter direct threats and to continue growing at an healthy rate. This quarter is a testament to this strategic plan. We achieved USD 154.5 million in revenue and USD 0.56 in fundamental earnings per share, which in rand terms translate into a 19% and 16% increase when compared to our first quarter 2015. We have been successful in scaling up our EasyPay Everywhere business, expanding our financial services businesses and further developing our ZAZOO business, in both South Africa and elsewhere in the world. We continue to scale all of our strategic businesses as we expect these to deliver higher revenue streams with improving margins. Herman will provide the details of our financial performance, but I want to focus on some key strategic areas such as EasyPay Everywhere, ZAZOO and our card-centric activities. I will also provide an update on the latest SASSA development. Perhaps, let me start by updating you on the SASSA contract. We have already informed you that last month, SASSA decided not to award the RFP and that therefore, our contract would remain in…

Thank you, Serge. I will discuss the key results and trends in our operating segments for the first quarter of 2016 compared to a year ago. For Q1 of 2016, our average rand dollar exchange rate was ZAR 12.96 compared to ZAR 10.76 a year ago, which negatively impacted our U.S. dollar-based results by approximately 21% and the South Korean won was 13% weaker compared to last year's won rate. We continue to face significant currency headwinds in our operating geographies. The U.S. dollar, our reporting currency, remains strong against the emerging market currencies and the South African rand is currently trading at around ZAR 13.94 to the dollar, while the won has strengthened slightly over last the few months and is currently trading at KRW 1,144 to the dollar. The stronger dollar has again had an adverse impact on our results. Fortunately, we have experienced good growth in our functional currencies and therefore due to the fluctuations caused by the volatile exchange rates in our operating currencies, we provide constant-currency comparatives in order to analyze the core operating trends in our businesses. We have again started the year with a very strong foundation in constant currencies with revenue and fundamental earnings per share growth of 19% and 16%, respectively. On a consolidated basis, for the first quarter of 2016, we reported revenue of $154.5 million and fundamental earnings per share of USD 0.56. Our fully diluted weighted share count for Q1 2016 was 47.1 million shares. Let me now turn to a discussion of our segments and their financial performance during Q1 2016. In our South African transaction processing segment, we reported revenue of $55.6 million in Q1 2016, down 8% compared with Q1 2015 in U.S. dollars, and up 11% on a constant-currency basis. In South African rand,…

[Operator Instructions] Our first question is from Dave Koning of Baird.

Yes, my first question, I think you said there are 90 countries now that are participating in the World Food Program and that you want to basically get your same level of services, your same type of services into those countries as you enter. If you look out 3 to 5 years, and just had to guess, how many countries you think you could put systems in pretty similar to what you have in South Africa, and that could become decent revenue contributors of those 90 countries, how many countries might that happen at?

David, that's a difficult one. Typically, the first thing we have to ensure is that when we enter a particular country and that's always difficult thing, the WFP gives us the chance to actually come into a particular country, sort out using them, using MasterCard, any of the so-called issuers that are local to any country, namely Central Bank, finding a baking partner, making sure the system is certified to be used in those particular environments. And that's what the WFP is going to give us at the end of the day. Even we will make some form of profit, of course, through making WFP payments, but we're not focusing on how profitable is this going to be. Once that is happened, the beauty is that the rest of the exercise, because now the infrastructure has been paid for, the rest of the exercise is to now where do you find the right teams of people in order to do the marketing and to be able to sign up the similar sort of business partners that we have here in South Africa. So it could be merchant stores, it could be banks, it could be M&As or that sort of thing. So the bottom line is that if -- look it's unlikely we go into 82 countries or 90 countries in the next 3 years. We're hoping, but with a little bit of luck, once this thing starts ramping up, I'm hoping that we should be able to implement 2 to 3 countries per annum. How long in each from the time that we actually commence operations, I'm not talking about WFP. I'm not talking about rediversification of WFP. I think that normally would take anything between 12 and 18 months. So if you look at 2 or 3 countries over the period of 3 to 5 years from now, we should be with WFP in at least 10 countries. That's what we will be aiming at doing. And then, you better give yourself a lag of about 12 months to 18 months for each of these countries to start creating, operating and making some money. And after that, as you know, all that happens after that deal flows down straight to the bottom line. At the moment, that's about all I can tell you, David. I know it sounds a little bit unclear for us, but that is, to me, a wonderful opportunity simply because we are able with WFP to put the foot in the door.

Okay, great. And my second question just with SASSA, with the contract coming up March 31 of '17, do you still have a high level of confidence that you can more than offset any lost revenue there and that you can keep the license contract? And I guess basically the whole thing here is 2 years from now and we look at profits, do you have continued kind of confidence that there will be up from where we are today and that the loss of that won't make profits be down in a couple of years?

So David, we have tried in many ways to explain the strategy and sometimes, it's difficult to do it over the phone and just with a document. But the bottom line is we now know that until March 31, 2017, nothing is going to change right? We also know that after March 2017, there's no doubt that there will be if possibly would be a phase in and phase out that according to the previous or the last RFP could range between another 9 and 18 months, so even if call it another 12 months to make it easy, which means that it's 18 plus 12. It's 30 months from now. That's assuming that SASSA has spent quite an enormous amount of time on this last attempt at trying to get a tender out and trying to award this tender. They said so themselves they're running behind on plan. So there is a chance that in fact, we are not even be leaving [ph] by March of 2017. It might take another 6 months before they can even begin to phase out. So we could be looking at anything between 30 months and 36 months, before in theory, we are no longer the operator of SASSA accounts. Now when I say that, we've always stated that just because we don't want to directly be the operator, doesn't mean that indirectly, for example, SASSA is also saying they want to go basically into tender again in order to provide the cash payment. That cash payment applies to around 3 million people at the moment, and today, we're probably the only people with an infrastructure to go after the rural areas to pay these 3 million people. So that's probably not going to go away even if what SASSA has just stated.…

Our next question is from John Rolfe of Argand Capital.

Just a clarification, the press release indicated that there were 350,000 EasyPay Everywhere customers signed up, I believe, but it sounds, Serge, like you've said a couple of times in your comments that there were 450,000. Which is the right number?

I think the reason is, is because the number 350,000 was at the end of October.

End of the quarter.

End of the quarter. While now, I'm talking numbers as of -- I guess get the information is up-to-date.

So to be the clear, over the last 5 days, the subscription rate has been approximately 17,000 of new accounts per day and that accounts for the extra 100,000.

That's the difference.

And I think initially, you had commented that you thought the EasyPay Everywhere customers you are signing up might come in at just a modestly sort of higher tier on, I don't know what the right word is, but on a sort of socioeconomic spectrum than your typical grant recipients. Is that sort of still what you're seeing in terms that you have that data?

Yes, we're starting to see a little bit of what we were hoping mainly that now that we've deployed and you probably saw it through our ATM transactions. And to give you a typical example, when we started, there were no ATMs whatsoever, the bottom line is that the people that were making the money were the banks that actually owned the ATMs. They are the guys that we are getting the interchange fee, which is set by the South African Reserve Bank, which is around, call it, ZAR 10 to ZAR 1,000 that is withdrawn. As we implement more ATMs ourselves, we are now starting to get these ZAR 10. And then of course, we put out more of our EasyPay Everywhere customers, those customers tend to come rather to our ATMs because they're biometrically enabled, #1 and #2, because our transaction fees are cheaper. So we currently converting the amount of money we used to make after another bank's transaction, which is no more than about 15% of the value, call it ZAR 1.50 per ZAR 10 and we're converting that to about 4x that amount which is ZAR 6 to ZAR 10. So the more customers we continue to have on EasyPay Everywhere then the more places that can start drawing cash or performing transactions, which belong to us, we quadruple basically the amount of money that we're currently making and that's where the real economics of this thing comes in. On top of the course of the fact that we have been in a good position to offer them Manje services as well as our loans as well as out insurance as well as a number of other products. So we're getting very excited. That's why they would come out with a number to say divide 10 million by 4 and if we can get 2.5 million people, we basically would be the same as you see at 10 million. Of course, we're not aiming at 2.5 million people, we're aiming at 4 -- 4.5 million people. So that's where we believe we can continue to grow and grow quite exponentially. If all of the numbers I've talked about actually come to realization and it appears that what we have seen to date that in fact the numbers are actually pretty much correct.

And the last thing I have is just a comment. You indicated that there's a number of very attractive alternatives for cash deployment and it sounds as if certainly from an organic growth perspective, new products, that sort of thing, there's some potentially very high return projects in there. I would encourage you just to, to continue to be balanced on the cash deployment and continue to allocate at least a portion of that to share repurchases given where the stock's trading. It's obviously a high return use of cash. And I think, in addition, it has the ancillary benefit of sort of lifting some of the concerns against the company that have been lodged in the past. So again, I'm not looking for anything extreme. I will just encourage you to be balanced if you continue to put some of the cash towards share repurchases going forward.

That's noted and I can assure you this is an issue that gets debated every quarter, couple of meeting on numerous occasions. And I think, sooner or later we will do a split so the board in terms of what we should do, we should issue a dividend should it be a share buyback, what should we rather keep a little bit of war chest in order to make sure that if we want to make a few acquisitions in order to enter certain territories, should we rather keep the money while we can. But I think, we are as you know, very cash generative. And I think that is something because of that, that is the cash stock accumulating, we will have to start looking at seeing how we can utilize this cash a little bit better than what we've done in the past.

Yes. Well look, you guys are in the enviable position like you said of generating a lot of cash, having a very strong balance sheet, so that gives you a lot of flexibility and an ability to do more than one thing at once in terms of cash deployment. So I look forward to see the decisions you make and keep up the good work.

Thank you very, very much, and we will. Certainly your comments have been noted.

Our next question is from Russell Anmuth of Gotham Holdings.

How much of the expense, the CapEx is behind you in terms of the EasyPay and ATM-related in Smart Life investments, as it seems probably was in corresponding revenue in the quarter to that and seems like there is significant leverage ahead and may be profitability was a bit understated in the quarter.

From a CapEx perspective, I think we have now incurred most of what we had to do to build out the infrastructure, specifically on the EasyPay Everywhere side. We think there may still be a little bit to go on the Smart Life side as we expand our office presence across the country. From an ATM perspective, as we've indicated we got about 800 ATMs out there and I think the initial high-growth rollout is behind us and obviously, we will now strategically locate the remainder of our ATMs. So you're still going to see some CapEx spend on the ATM side and we think that we could probably end up over the next year to 2 years at roughly 2,000 ATMs. But in terms of total quantum, the CapEx that we will spend on that per quarter is not going to be very significant. As far as the operational expenditure is concerned, specifically on the EasyPay Everywhere and Smart Life rollouts, those were obviously quite high during the last quarter and will probably continue to be the same in Q2. We obviously have quite a bit of expense in terms of recruiting staff members, getting them out into the field, so the related expenses in terms of vehicles and fuel and maintenance and accommodation. We're also running some marketing campaigns at the same time to create the awareness that we feel is necessary. But after Q2 and going into the latter part of the year, I would expect those expenses to reduce and for the margins that we will see specifically from EasyPay Everywhere and from the Smart Life side to improve, and then of course, there's also the CapEx and OpEx expenses that we anticipate to incur as we build out ZAZOO internationally. So at the moment, we have our operations in India and in the UK. Those 2 specific points we think we need to sort of bulk up a little bit more as we get more projects underway and we need more staff members to assist us, specifically from a development point of view so that obviously will also require little bit of CapEx and some investment in operational expenditure over the next 3 quarters or so, specifically as it relates to ZAZOO. But in the greater context of things, again, it's not going to have a material impact on the overall margin of the group.

Okay. So it seems like at least, on the South African investments that we should see better and even better and the next -- in the current quarter, in the December quarter?

Yes, I hope so.

The follow-up. So 2 things, 1, can you offer any outlook on Hawks [ph] the and talking about the MVC and ZAZOO, do you see more interesting opportunities like Uber in the pipeline or within Uber, let's say, expansion into different countries?

Well, there's 2 things and I don't know it must be frustrating for you guys and it's probably even more frustrating for us because we were told that we would have the summer report from the Hawks [ph] already to be, as almost 5 months ago. We now have found out that in fact there were 2 concurrent cases, which one of them we had filed. And that report is apparently finalized and we are being told again because we asked that the second report will also come out within the next week. Okay, so we are hoping and as far as I know, neither one of the reports are going to say that we were guilty of anything that. That we're going to be guilty of something we haven't done. So we're hoping that, that is going to be, once and for all, beyond us. But I also don't want to be called a liar because I tell you what I've been told and fortunately until now, I've got it on my hand. We're not going to commit to anything. But we hope that we have been promised again that it will be very, very soon. So that's the Hawks [ph]. On MVC, you'll be pleased to know at least I'm very excited to know that people already [indiscernible] have already made a commitment that because of the success of our systems in South Africa, but as soon as we are able to issue VC, MVCs in Europe that they would extend the service to the European market as well and to any other market in the world, where we are able, of course, to convert local products into a virtual card, into a virtual credit card. So that's one example of the business that in fact people are…

What does that mean? Does that mean that if you're not going to leave the money, you're going to capture your fair share plus? Does that mean -- how does that work with establishing a banking relationship?

Well, I'm not going to -- I can't give you anything, but I think you are probably have looked up -- you have probably worked up the answer yourself.

So you're talking about a banking relations a potentially with one of the large European multi-country banks?

No. I'm not interested in any relationship with any bank because they are going to want to milk most of the money. We're not that good at sharing revenue or profits with anyone.

So if you don't go with the bank, what kind of financial intermediary do you bring into this picture?

You're going to force me to give you an answer, but let me give you an example. We could be a bank. So if we were a bank, we could issue and if we could issue, I don't need anyone else.

So that means you have to apply for licenses country by country [indiscernible]?

No, because as you know, all you need is a certain type of license in which case you can access 31 different countries. Let me not say any more than that.

[Operator Instructions] Our next question comes from Jordan Hymowitz of the Philadelphia Financial.

First of all, should I get a specific dollar amount of expenses on the World Food Programme and the life insurance programs last quarter that obviously did not generate any revenues last quarter?

Yes, the answer is very simple. Everything we offer right now is cloud-based platform. A number of people were basically engaged either with MasterCard or with WFP and a certain amount of legal fees we wanted to make sure that the contracts are in place. I would say that we're talking about a few hundred thousand dollars and that's about it.

Okay. Second question is, when you get brought in '17 when the South African government begins to internalize some of these things, I don't think it's in the government's interest to allow 10 million people to have a disruption in benefits although politics makes strange things. So given that, once you internalize that, you're likely to get paid some technology fee and I would argue that the technology fee is a much higher multiple business even if it's a lower revenue business. So I guess my question is, if the government elects to pursue your technology, will you break out the technology revenue as a separate line item, which I would argue is worth a much higher multiple?

Once again, I think you made 2 comments, which are very valid. One, politics. One thing we know and we've known for many, many, many years, that has led to the cancellation of the latest RFP is the government will not take any chances in terms of jeopardizing the payment grants to 10 million people that represent anything between 10 and 17 million voters. So that point of your view is more than valid. So the second point is you are 100% right. Let's say that a lot of our business that we do in CPS today, which is really not a rational [ph] entity, is not the most pleasant, attractive affinity [ph] business. There is absolutely no doubt that that's the one that costs the most and thus, the margins are very low. In order [ph] to renegotiate in such a way whereby that could be internalized by SASSA, we would remove, to be quite honest, a fairly large chunk of cost and candidly we would not lose a huge amount of profit. On the other hand, of course, if we had to then try [ph] that technology, we could then assume that those technology margins would be certainly in the 50% to 60%. Rather than to be in the CPS margins, at the moment, whereby at the moment, we're probably not even at 20%. We're probably down at the moment on 14% or 15% because we're aiming at 17% to 20% towards the end of the 5-year period as an average. So I think it answers both of your questions. And I think you're right in your assessment. That's certainly something that we would do because we would no longer be, strictly speaking, rational from the point of view of issuing cash to beneficiaries through a pay front or at the pay-point that we would simply restrict ourselves to providing the glue, namely, the technology core solution that makes that happen.

Ladies and gentlemen, we have come to the end of today's conference. On behalf of Net 1 UEPS Technologies, that concludes today's call. Thank you for joining us. You may now disconnect your lines.