Good afternoon, ladies and gentlemen, and welcome to Net1’s Third Quarter 2017 Earning Conference Call. All participants will be in listen-only mode. There will be an opportunity for you to ask questions at the end of today’s presentation. [Operator Instructions] Please note, this conference is being recorded. I would now like to hand the conference over to Mr. Dhruv Chopra. Please go ahead, sir.

Thank you, Juris. Welcome to our third quarter fiscal 2017 earnings call. With me today are Serge Belamant, our CEO; and Herman Kotze, our CFO. 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 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. Before I hand the call over to Serge, I want to state that we will have a question-and-answer section following our prepared remarks. However, given the current sensitivities, we will not be taking any questions about SASSA or CPS. With that, let me turn the call over to Serge.

Thank you, Dhruv. Good morning to all of our shareholders. In my presentation today, we’ll focus primarily on our strategy, both for South Africa as well as our international market and how we intend to build a long-term sustainable and diversified business with rand and hard currency-based earnings streams. I will also briefly deal with the reputational challenges we face as a result of actions taken by certain individuals and institutions each with their own agendas. I will also provide a quick status update on our SASSA contract. For quarter three 2017, we reported revenue of about $148 million, which was up 10% in dollars, but down 8% in South African rand. Lower ad hoc hardware sales, fewer [ph] prepaid airtime sales is a result of the introduction of our biometric-linking feature introduced, and regulatory changes in Korea were the primary factors that adversely impacted our revenue this quarter. We also reported US$0.43 in fundamental EPS, which was flat in dollars and incorporates the higher share count. Over the last few months, the company has been subject of many adverse decisions for multiple parties regarding its business practices in FX, government relations and the alleged exploitation of 40% of the South African population. These allegations have been made by numerous parties, most of which are NGOs, such as the Black Sash and GroundUp and certain individuals employed by SASSA and the Department of Social Development. In a height of the political anxiety in February and March, some of these parties went as far as to insinuate that we were the reason for SASSA’s inability to in-source the distribution of grants, despite us having no role or influence whatsoever in the driving forward of their process. Of course, other organizations and journalists use this platform to create their own conspiracy theory…

Thank you, Serge. I will discuss the key results and trends within our operating segments for the third quarter of 2017 compared to a year ago. For Q3 of 2017, our average rand/dollar exchange rate was ZAR13.22 compared to ZAR15.82 a year ago, which resulted in a positive impact in our reported results. We continue to absorb our growth investments and managed through certain regulatory constraints in Korea, which in turn will help us drive improved growth in fiscal 2018. In U.S. dollars, revenue for Q3 2017 increased by 10%, while fundamental net income grew 19%, and fundamental earnings per share was flat. Ad hoc software sales and the lower managerial revenues due to the introduction of our biometric-linking features had a $10 million adverse impact on our Q3 reported revenues. On a consolidated basis for Q3 2017, we reported revenue of $148 million and fundamental earnings per share of US$0.43. Our GAAP EPS and fundamental earnings per share was impacted by the weighted average issuance of 5 million shares of our common stock in February 2017 and 10 million shares in Q4 2016, partially offset by buybacks of 5.5 million shares. By segment, South African transaction processing generated revenue of $64 million in Q2 2017, up 26% in dollars. In rand, the 6% increase in segment revenue was primarily due to higher EPE transaction revenue, increased intersegment transaction processing activities and a modest increase in the number of social welfare grants distributed. Operating income decreased primarily due to the impact of annual salary increases granted to our South African employees, partially offset by higher EPE transaction revenue and a modest increase in the number of social welfare grant distributed. Our fees earned from SASSA for the distribution of special welfare grant has remained unchanged. The Constitutional Court has ordered…

Thank you very much, sir. [Operator Instructions] The first question comes from David Koning of Baird.

Yes. Good morning, guys, and thanks for taking my call. I guess, my main question, I guess, my first question is not that long ago, maybe a year or two ago now, you entered the relationship with the World Food Program and then you did the deal with IFC. Just wondering an update as you make big partnerships like that, are those helpful in generating new sales, new revenue distribution channels, et cetera?

David, let me perhaps give you my sort of two cents worth on this one. And the World Food Program we said from the beginning was a program which we entered into as part of our responsibility in our view to assist, to develop financial services in different developing countries, we have commenced, as you know, operations in Zimbabwe. And one thing we have found with the World Food Program is that, it appears to take a huge amount of time for them to be able to then come out with an international plan, where they could, for example, deploy one specific technology in multiple countries at a time. The reason for that, it has been told is that, they have to consult and work with local partners in each of the countries, although, that they might be saying to them we have a generic solution, we have to convince each country individually that the solution is the toughest solution that each of these countries wishes to have. This is taken, therefore, as delayed the implementation in other countries. We believe it will happen, but we’ve never really counted to make a substantial amount of money out of the World Food Program. What we wanted was to have the ability to have a foothold in these particular countries, build on the World Food Program that would allow us then to actually grow our own technology core platform faster and obviously to start offering our financial services as well as our banking platform to other citizens that are not on the program. So that’s the World Food Program. When it comes to the IFC, the IFC, as you know, is a different animal entirely. We continue to work closely with the IFC. And candidly, the IFC have been quite useful to…

Okay, great. Thank you. And then, I guess, my follow-up question, you talked about investing, kind of, $15 million into the international segments. You think it can grow rapidly across many countries and finding links between first and third-world countries. Will that fall within like ZAZOO and Masterpayment, et cetera, or is there almost a new bucket of revenue or new types of products that will be sold? So I’m just, I guess, wondering if it falls within the current product suite, or are there kind of new groups or revenues that are coming?

It’s a bit of both. In other words, the idea is to put all of the international businesses under one roof and candidly these businesses will all be called Net1 and they want to have their own generic name, that’s very important. More importantly, we believe that all of those businesses are not going to be built on top of our digital bank, which is our UEPS/EMV platform. And because we will have the platform as the underlying technological solution, each of these businesses will not be able to promote other financial services, which they do not promote today. So Masterpayment today might be, for example, signing up or becoming the acquirer for online merchant and providing them with some finance. But they are not today providing the same client with the banking platform, EFTs, debit orders or any other formal banking product. The idea is for them to start doing that as well. So it’s not only growing what they are currently doing, but it is also providing to the existing and new customers the ability to provide far bigger, far greater, far different, different types of products, specifically in the financial arena. So that’s Masterpayment. If you look at what I explained in India, it’s the same thing. You kick off with a company that happens to be basically a wallet company. And as we all know, wallets, either you believe in them or you don’t, we believe wallets are fantastic way of doing cheap or low-cost customer acquisition, but long term, that would simply die a natural death. As soon as we introduce these wallets and convert them to a banking account, where you can start selling these clients financial services, you are no longer making money out of that interchange fee, you are making money out of the products that you are selling client and making, of course, the client far more sticky. So once again, we are looking for all of these different opportunities through the investments we’ve made in order to really get low-cost customer acquisition and to convert those particular business models into a banking platform, a digital banking platform in order to be able to sell not only small businesses, but the clients of small businesses, the financial products that we currently know that we can sell in South Africa. So I don’t know if it answers your question precisely. But the idea is, yes, let us use what we’ve got and grow it, but let’s give it a chance to grow faster because of the underlying products we can not offer, on the one end, but more importantly to make sure that we can provide different services and other services, therefore, making sure that their income streams that we can generate are also new not only growing from the traditional businesses. So it’s a little bit of both, but the plan looks very, very exciting to us.

Great. Thank you.

David, it’s true.

Yes.

Sorry, I just wanted to add one quick point to what Serge said. So, obviously, the UEPS/EMV digital banking platform is a cornerstone. And all of the individual products kind of plug into that platform. So it is obviously giving you examples that are very relevant. And just I wanted to throw up one other one out there, which is these products were, say, Masterpayment’s working capital finance. Wherever the platform is deployed, automatically it will pull through those products like a working capital finance into India, Nigeria and other places in there. And so that the banking platform is what will enable us to really go out and scale these businesses quickly.

Okay, gotcha. Thank you.

Thank you. The next question comes from Porter Collins of Seawolf Capital.

Everybody, I don’t have a question more of a statement. I just want to comment the Board for listening to its two largest shareholders and improving some of the corporate governance, because the stock has traded for too cheap for too long. And one of the most important assets of the company is cost of capital, and selling 5 million shares at 2.5 times EBITDA is – seems crazy to me. So, increasing the number of Board members as you’re seeking to do that, I would say, increasing the independent Board members who are technically proficient in this – in your business is a great idea. And splitting the Chairman and CEO roles, as you can see, most of U.S. companies that’s the norm these days and I commend you on doing that. And then lastly, and in terms of the reviewing the relevant parts of the business, as you know, I’ve said that for the last couple of calls in terms of putting numbers out there and in terms of accretion to all the deals you’ve done, you have a lot of puzzle pieces out there, and making new right moves now is imperative. And whether it’s internally reviewing or bringing in outside consultant, I don’t really care. But I think these next moves are important ones, because you have a lot of pieces out there that you can put a great puzzle to work. You would just need to do it effectively, whether it’s Blue Label or Cell C, I don’t know, there has been – obviously, been some changes in those recently. So I just commend – I’m happy with the Board changes, and I think that there’s needed to be more done and do quickly, because you have a lot of things lining up over the next year. So I would say, please move with speed on that. So thank you very much.

Thanks, Porter.

Thank you. [Operator Instructions] The next question comes from Tyler Baron of Sentinel Rock Capital.

Hi, guys. Thank you for taking my question. This is – I like to spend sometime on Blue Label and Cell C. I know the transaction is not done yet, but just a back of the envelope calculation based on publicly available information suggests that could add about $0.50 or $0.60 or more per share in earnings. Are our calculations on point? And could you delve more into that?

Sure, Tyler, it’s Herman here. So, obviously, it will depend to a large extent on the accounting treatment that will be adopted. For those two investments, both of those are under the 20% threshold. And the Board has yet to make the determination exactly how we will account for them, so either as equity accounted investments or using a fair value approach. That determination will be done over the next quarters, or certainly by the time we get to our end of year results in August, we should be able to provide you with that specific information. I obviously can’t really comment on the quantum of what you’ve calculated without really seeing the details of it. But I think the other important thing to realize is that, other than the revenues that are generated by these businesses and obviously the profitability generated by both of these businesses, the other very important aspect to bear in mind here is that, we believe there’s enormous and logistic upside in combining our logistical infrastructure and our ability in South Africa to markets and sell products across a number of clients and customer groups. That in itself, we believe will be of a huge benefit and an accretive benefit to the shareholders. So regardless of the independent performance of those two businesses, and I have to add the third element here, which is a business called DNI, which we will acquire probably shortly after the Blue Label and Cell C investments have been made and it’s all related to those two in any event. But if we look at the picture and its entirety, we bring a specific element into the complete solution. Obviously, Cell C brings the mobile license and the ability to product – to bring product and to price product in accordance with what we believe is required in our market space, whereas Blue Label and DNI bring also very specific distribution and customer fits into the equation. So that for us is also the exciting upside of completing these acquisitions.

[Multiple Speakers] give you a little bit – yes, to give you just a little bit more color on this, because I think Herman is obviously right on the pattern is that, what’s important here is that these acquisitions for us are not made purely because of the fact that we are investing in Blue Label or Cell C. We believe that both of those investments will be actually – would give us a very good return. What’s exciting for us is that, we believe that we can build our business far more by cross-selling products and our financial services products into the Blue Label and the Cell C base, and for them to do the reverse. In other words, for us to start definitely acquiring clients that will require data or voice services or cell phones or any other mobile-driven applications on the one end. And on the other side for them to be able to offer their clients with financial services, including, for example, a very, very low-cost banking account. So if you put the two together and by the way, this has been tried in South Africa numerous times by many of the other operators and they failed, simply because they think don’t there was enough basically skinning the game between the parties. And there were two mutually exclusive from each other, and everybody wanted to take the biggest part of the profit, and that’s why it didn’t worked. We believe by doing what we are doing now, we are breaking down that surface tension, which is going to allow us to really actually generate brand new income streams and to be able to probably, at least, double our customer base, not only on the financial service side, but hopefully double the customer base on the mobile side as well. So for us, it’s a greatly exciting prospect regardless of the fact that we have a 15% in Blue Label or 15% in Cell C. These things would necessary in our view not only to make the deal happen, but more importantly, to make sure that we are all involved and we become part of the big family rather than to work independently of each other.

Thank you, both. That was very, very interesting and exciting, so good luck for closing that deal. My second question is about CapEx and free cash flow. You’ve really after years of CapEx spending, heavy spending on infrastructure, POS systems, ATMs, you’ve substantially reduced CapEx over the last few quarters and you are on track to do about $100 million in free cash flow 2007. Is that going to remain – is that CapEx spend going to remain over the next few years? I mean, do you envision it going up or down, or is it going to remain a new normal?

Yes. Based on our current projections and information just on an add is basis and assuming that our current group remains in the same form and shape, I think that the CapEx expenditure rate that we’ve seen in 2017 will become the new standard rate going forward. The big contributor to CapEx, as you know, over the last couple of years has really been KSNET, where – in terms of the model followed in the South Korean merchant processing market, the VAN companies were responsible for the acquisition and really donation, if we lack of a better word, our point-of-sale devices into the retail base. The current legislation or the legislation that was changed over the last year or so has completely revolutionized that specific model. In other words, the VAN companies are no longer giving away these point-of-sale devices to their clients and not allowed to do so in the most circumstances. And so the savings that you’ve seen in the CapEx is really a result of the change in the business model in South Korea. Over the last year, we obviously also had quite a significant investment in our ATM infrastructure, and we rolled out approximately 1,000 of those in South Africa over a fairly short period of time. Although, we are expecting to continue the rollout of our ATM network here, it will be at a much slower pace as we identify the most optimal spots for those. And if we look at all of the other businesses and specifically the plan as it’s been communicated by Serge, none of our other businesses on the international side, on the digital banking side of things are really capital-intensive businesses. So these are all specifically service-focused businesses. And so I would not expect our CapEx to increase to the levels that we saw in 2015 and 2016 anytime soon.

Thank you, Herman. That’s very helpful.

Ladies and gentlemen, it is just turned 9:00 AM and we have come to the conclusion of our conference call. On behalf of Net1, that concludes our today’s conference. Thank you for joining us. You may now disconnect your lines.