Net 1 UEPS Technologies Inc (NASDAQ:UEPS)
Q4 2014 Earnings Conference Call
August 29, 2014 08:00 am ET
Dhruv Chopra - Managing Director and Country Head India and Head of Investor Relations
Serge Belamant - Executive Chairman of the Board, Chief Executive Officer
Herman Kotze - Chief Financial Officer, Treasurer, Secretary, Executive Director
Dave Koning - Baird
Russell Anmuth - Gotham Holdings
Good day, ladies and gentlemen, and welcome to the Net 1 UEPS Technologies Inc. Q4 2014 Earnings. All participants are now in listen-only mode. There will be an opportunity for you to ask questions after today's presentation. (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 fourth 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-K, are available on our website at 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-K regarding the risks and uncertainties associated with forward-looking statements.
In addition, during this call we will be using certain non-GAAP financial measures, which 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-K and in our press release in rand to assist investors in understanding the underlying trends of our business. As you know, that company's results can be significantly affected by currency fluctuations between the dollar and the rand.
With that, let me turn the call over to Serge.
Thank you, Dhruv. Good morning to all of our shareholders. Our fourth quarter results once again demonstrate the group's ability to implement the large and complex national projects efficiently and to rationalize our cost structures in order to drive margin improvement.
We are now able to turn our attention to international markets - is a critical and integral part of our growth strategy. This strategy is mobile, but payment-centric and deliver solutions that incorporate a number of killer applications in the space of money transfers, loyalty programs, and electronic wallets and of course secure card note payments.
Our new streamlined and focus operational teams are ready for significant expansion both, locally and internationally. This new drive will allow us to further diversify our risk profile from a geographic, currency and customer point of view.
Over the past few years, we laid out the strategic roadmap for the company and to-date have executed exceptionally well against that strategy. In fiscal '12 and through fiscal '13, our overarching focus was the successful implementation of our SASSA contract.
Over the period of 15 months, we registered ZAR 22 million, open 10 million bank accounts and operationalized the seamless, secured and inclusive social growing distribution system for the South African government.
The result, our efforts have widely been recognized by the relevant authority and annualized savings of ZAR 3 billion and sufficiently demonstrated that SASSA chose the most progressive and comprehensive solution along with a service provider with a track record to deliver on its promises.
In fiscal 2014, our focus shifted to leveraging our national infrastructure to introduce relevant, cost effective and easy to access products and services to our cardholder base. Once again, with mobile transaction posting growth of over 400% and a financial product expanding by over 500% in fiscal 2014, we demonstrated further successes in the execution of our plan.
More important however, is our success in providing financial inclusion for millions of previously disadvantaged South Africans. Financial inclusion has been spoken about by many, but few have been able to demonstrate any real degree of success.
For our company, financial inclusion has more than been able to open a bank account, but rather to enable customers to access the top of products, which they really require to improve their lives. These products incorporate access to information first and foremost, which in turn facilitates an eligibility and lowers inherent risk, but enables the most affordable pricing model.
These products include savings account, microfinancing, insurance, prepaid services, money transfers, loyalty programs, educational services, healthcare, Internet payments and numerous other life-changing services. What differentiates us from our competitors is that we are able to provide these products and services at the lowest possible price due to our flexible and secured technological solutions, which assist us to minimize the associated risks.
In addition, we design each product to target a specific need and price such product accordingly. Our microfinance products for example vary in terms of their cost structures, depending on the reason for their requirement ensuring the critical priorities such as irrigation, healthcare, electricity and any emergencies can be addressed and be affordable to most South Africans.
We have now reached critical mass and can therefore provide any goods or services sought back estimates at the most competitive price. We often can achieve this goal by entering into loyalty programs with manufacturers or wholesalers, thus once again reducing the cost to our customers we sought [eroding] our own margins.
One will see net 1 entering new fields of business in the short-term, all of which are designed to fulfill the needs of our customer base. Such new products will include insurance, basics food products, educational products only to mention a few.
During 2014 and 2015, we are going to leverage our switches such as KSNET, EasyPay to a smaller extent on the medium and [programs] together of course with our virtual top-up or VTU technology as implemented by MTN in Nigeria the Ivory Coast, Cameroon in South Africa.
We are well placed to use the footprint of these switches to expand our services to incorporate prepaid products, money transfers, bill payments and of course internet payment.
Our advanced airtime success in Malawi in South Africa demonstrated such a strategy is sound and successful. For example, our Malawian initiative which only commenced in March of 2014, few months back, is already activated in excess of 500,000 users would transact approximately 200,000 transactions per day.
In South Africa, our mobile offering is not over $5 million distinct individual customers. We expect approximately $2.3 million transactions per day across our airtime, electricity and of course information services channels.
Since appointing our MD in India, we have now an established local presence and are now in the finalization stage of registering a 100% on subsidiary, which will drive the business development if it's across (Inaudible) top product pick.
We have recently entered into an agreement with one of the leading prepaid and digital wallet providers in India with over 1 million users. Digital wallets in India typically are closed group and our MVC solutions will allow these products to become interoperable, thus creating and open loop system.
E-commerce is growing exponentially in India, however 60% of transactions are effected through cash on delivery due to the lack of the widely available and simple to use secure electronic payment solutions. With MVC, we have a significant opportunity to facilitate the CNP transactions securely.
We expect that by the end of this calendar year, we will have two large MVC deployments deployment in India, the other one being with one of the India's largest private sector banks that is in excess of 20 million clients.
Due to confidentiality restrictions, we will formally announce these initiatives along with additional details as soon as our partners are ready to disclose this information. Because we believe that our mobile strategy will be a significant driver of value creation in the near-term, let me spend a few minutes outlining our immediate plan.
First, our mobile solutions are agnostic to operators, manufactures and operating platform. However, we will continue to pursue strategic partnerships with these major players globally in order to achieve scale as quickly as possible.
Second, our board has concluded that we should drive customer acquisition directly in order to better control our destiny and our ramping up of our customer base.
Third, in about few months, we have refined our mobile offering that will offer a comprehensive and integrated set of products, which use MVC as a channel to facilitate payments across any existing national payment system.
These solutions will allow users to minimize risks across all of the physical, consolidated many as a loyalty programs and leverage our EasyPay expertise to facilitate prepaid utilities and bill payments, money transfers, (Inaudible) transit and other ticketing services.
Finally, an integral part of the strategy is to establish an independent subsidiary base in Europe that will be responsible for executing our mobile strategy on the worldwide basis.
Although, what I have just mentioned will become our core strategic focus over the next 12 months. We will of course continue to grow and pursue opportunities in South Africa, such as CPS, EasyPay, financial and value added services as well as our first business initiative.
In June, SASSA filed an update and timetable with Constitutional Court apprising them of the progress they had made. Since the remedy was announced in April of 2014. By this schedule, the new tender would be issued as soon as practically feasible and SASSA would then decide whether the tender once that is evaluated is awarded or not, depending on their readiness to provide the service in-house.
We do not guarantee any updates relating to the timing of the tender with the specifications thereof. As an when the tender is issued, we look forward to participating in the same and remain very confident that our track record, technology, distribution channels, cost structures and new enhancements will ensure that we remain an integral part to the South African social welfare environment.
This critical social service is continuously being extended to more and more South Africans and will therefore continue to require secure, flexible and widely accessible solutions at the lowest possible price.
As a result of the above timing, we do not believe that there will be any impact due to the tender process on the company for fiscal 2015. We continue to engage the partners to formulate our success strategy and to structure CPS in a way that will afford us the greater chance of success.
The growth in our financial services business demonstrates that there is real demand for our products and that there are limited alternatives offered from the formal sector and that our products are the most affordable. As a result of a substantial time and effort, we have agreed to a plan with the FSB financial services board that should result in the equipment of our insurance licenses pension.
The removal of this expansion will ultimately depend on the FSB approval of our business plan and a better execution. We feel very confident about this step.
As and when we are able to offer our various relevant and affordable insurance products, we will expect to see another leg up in our financial services business.
Shifting now to the prospect of deploying UEPS/EMV internationally, we continue to work aggressively with MasterCard on a number of specific projects where we have jointly submitted multiple proposals and continued to await the awarding of such contracts.
At this point, these various proposals are outside the control Net 1 and MasterCard and rest with the relevant authorities in the various territories. In addition, we have also reached the strategic decision whereby Net 1 will now work more extensively with MasterCard and its global marketing and distribution teams to sell our UEPS/EMV solution internationally.
MasterCard in some form will therefore act as our indirect sales force for UEPS/EMV and Net 1 will largely focus directly on those opportunities in territories where we have a physical presences or it's part of an expansion of our service offering in a specific geography.
In conclusion, I am extremely pleased with what we have achieved over the past three years and more than excited about our prospects for the next three years. I strongly believe, we now have the right strategic plan, product fit, management and implementation teams to ensure that we can achieve a new period of sustainment for feasible growth, which in turn will be driving value creation for, of course, our shareholders.
With that, let me turn it over to Herman. Herman, over to you.
Thank you, Serge. I will discuss our new operating segments, which we have streamlined to three from five previously as well as the key results and trends within our operating segments for the fourth quarter of 2014 compared to a year ago.
For Q4 of 2014, our average rand dollar exchange rate was ZAR 10.42, compared to ZAR 9.19 a year ago, which negatively impacted our U.S. based results by approximately 13%. The rand remains one of the more volatile currencies in the world and is currently trading at about ZAR 10.65 to the $1.
Should the rand remained relatively more stable over the next 12 months the variation in our U.S. dollar based results due to currency should be lower in fiscal 2015. We ended the year with a particularly strong quarter and I'm very pleased with the momentum demonstrated throughout fiscal 2014.
On a consolidated basis for the fourth quarter of 2014, we reported revenue of $183 million, an increase of 76% in constant currency. We reported fundamental earnings per share of U.S. $0.91, which grew by 275%in rand compared to a year ago.
Our fully diluted weighted share count for Q4 2014 was $49 million shares. Our the results benefitted by the $27 million recovery from SASSA related to our implementation expenses incurred in fiscal 2012 and 2013. We do not expect such recoveries to be recurring.
Excluding the SASSA recovery, our revenue and fundamental earnings per share for Q4 2014 was $156 million; an increase of 52% and fundamental earnings per share for Q4 was U.S. $0.52, an increase of 86%. Our fourth quarter 2013 results included direct implementation and smartcard costs of approximately $9 million.
We have simplified our operating structure and accordingly our internal reporting structure has been consolidated from five reportable segments to three. Previously reported information has been restated. We currently have three reportable segments.
One South African transaction processing, two, international transaction processing and three financial inclusion and implied technologies. For further information, please refer to note 23 to our 2014 financial statements.
Let me now turn to a discussion of our new segments and the financial performance during Q4 2014. South African transaction processing or SA processing, predominantly reflects our core South African processing businesses, including CPAs, EasyPay, merchant processing conducted by our UEPS/EMV card holders and payroll processing through first.
International transaction processing represents our processing activities outside of Africa and includes primarily KSNET in Korea.
Other contributors include our U.S. and Botswana businesses and any new non-South African mobile virtual cards UEPS and V initiatives will be included in this segment.
Financial inclusion and applied technologies represents our initiatives that result in the provision of various services and products to customers that resulted in the inclusion to the formal sector as well as the provision of our technology both, hardware and software across our broad product portfolio.
This segment therefore encompasses smartcard accounts, Net 1 Mobile Solutions, including the mobile-driven prepaid solutions, financial services including lending and insurance and our hardware and software businesses.
South African processing recorded revenue of $88 million during Q4 2014, 52% higher in local currency driven primarily by the SASSA recovery and increased merchant processing transactions through the national payment system or NPS, which are lower margin transactions generally.
Excluding the SASSA recovery, South African transaction processing revenue was $62 million or 20% year-over-year growth in constant currency. Growth in the distribution of social grants was modest and largely in line with the increase in welfare cardholder recipients, net of the removal of invalid and turbulent beneficiaries.
South African processing segment operating margin was 44% in Q4 2014, compared to 0% a year ago. Excluding the non-recurring items during the SASSA recovery in Q4 2014 and the implementation cost in Q4 2013, segments margins in the fourth quarter was 20%, up from 15% last year.
Q4 2014 results also included many credit losses for two months as at the business units was sold in early June 2014. CPS volumes increased to 2% due to the organic growth in the number of beneficiaries added by SASSA, net of the of the invalid and [full] grant recipients removed from the system.
EasyPay volumes were up low-single digits despite the fact that as we continued to expand our value-added services offering to alternate general such as mobile, the volumes and revenues for those services are recognized by the respective units even though they rely extensively on the EasyPay platform and distribution.
Over time inflationary increases in our costs could modestly pressure our South African processing segment profitability and segment margin may vary depending on the mix of products, particularly volume of transactions through the national payment system.
We will however continue to seek opportunities to become more efficient and rationalize our cost structure in order to try and provide stability for segment margin.
Intersegment transaction processing activities are eliminated on consolidation. International transactions processing generated revenue of $42 million during Q4 2014, an increase of 52% in rand mainly as a result of South Korea-based KSNET, continued revenue growth during Q4 2014.
Our international operations are not as material to the segment revenue at present, but have more of an impact on segment margin as most of our hybrid investment phase will not yet achieve the scale to be profitable.
Segment operating income improved to 16% from 15% last year, driven primarily by gains in Korea and lower losses in our smaller initiatives.
For Q4 2014, KSNET revenue grew 9% in Korean won to $42 million, while EBITDA margin of 28% was up 100 basis points compared to last year.
Finally our financial inclusion in Applied Technologies segments delivered revenue of $64 million, a 146% higher on a constant currency basis.
The primary drivers of top-line growth were Net 1 Mobile and Financial Services, both of which posted year-over-year constant currency growth in excess of 400%.
Segment revenue was also impacted by a sharp increase in intersegment revenue, which is eliminated on consolidation. Net 1 Mobile ended the year with 154 million transactions, up from 24 million the year earlier and driven primarily by the introduction \of its prepaid airtime and more recently prepaid electricity solutions.
Our Ueps-based lending book at the end of Q4 2014 was approximately ZAR 560 million, compared to ZAR 449 in Q3 2014 and ZAR 83 million in Q4 2013.
Segment operating margin declined to 28% in Q4 2014 from 48% in Q4 2013, but largely in line with the last three quarters.
The substantial decline in margin year-over-year is primarily attributable to a higher UEPS-based lending, operating cost base, including the addition of nearly 1,000 employees over the past year, creating a provision for doubtful accounts, higher contribution from hardware sales and a significant mix shift due to exponential increases in our mobile-based prepaid airtime solutions, which carry materially lower margins than our traditional business.
Corporate and elimination includes amortization of intangibles, stock-based compensation U.S. legal expenses and general corporate and overhead costs. In Q4 2014, under U.S. GAAP, we were required to recognize a non-cash charge of $11.3 million related to the equity instruments issued pursuant to BEE transactions and in our segment reporting has been allocated corporate eliminations.
Our Q4 2014 net interest income increased to $3.1 million, driven primarily by lower average date outstanding and high average cash balances during the period. Capital expenditures for Q4 2014 and 2013 was $6.6 million and $5.6 million, respectively, and relate primarily to the acquisition of payment processing terminals in Korea.
At June 30, 2014, we had cash and cash equivalents of $59 million, up from $54 million at June 30, 2013. The increase in our cash balances from June 30, 2013 was primarily due to higher cash generated from our core business and the recovery of implementation costs from SASSA, partially offset by higher tax payments, the expansion of our UEPS-based lending business, capital expenditures and principal repayments for our Korean bids.
We continue to fund the group's operations in capital investments utilizing our cash reserve and cash generated from our business activities. During the next 12 months, we expect primary uses of cash to be the funding of our financial services offerings, investments in our high-growth businesses, the servicing of our debt, share repurchases and strategic acquisitions.
Our effective tax rate for Q4 2014 was 57.8% and was higher than the South African statutory rate of 28% as a result of non-deductible expenses, including interest expense related to our long-term Korean borrowings, stock-based compensation charges and the non-cash charge for the issuance of equity instruments pursuant to our BEE transactions.
Our tax rate will fluctuate depending on our intention regarding undistributed South African earnings and the timing of any payments and we expect our effective rate for 2015 to be between 36% to 40%.
As we prepare for any new potential SASSA tender, we reached an agreement a few days ago with one of our BEE partners to repurchase the Net 1 shares and they agreed to subscribe for a [12%] in CPS. As a result of these transactions, our share count is now approximately 46 million shares.
For fiscal 2015, we expect fundamental earnings per share of at least $1.92. Our guidance assumes a constant currency based now indexed to the fiscal 2014 rate of ZAR 10.40 to the $1 and a share count of 46 million shares. Also, our guidance includes the dilutive impact of the 12.5% outside holding in CPS.
Our fiscal 2014 fundamental earnings per share included ZAR 0.40 related to the recovery of implementation costs from SASSA and this will not recur in 2015.
We are very excited about our prospect for the next year and we look forward to replicating our successful implementations to-date with our new product launches across all our segments from financially inclusive insurance products to new mobile technologies and the rollout of a national biometric ATM network with our partners in South Africa. Some of these new projects are dependent on regulatory approval and maybe only start to scale during 2015.
To conclude, the company's executives have not sold any stock for almost five years now. However, we need to meet certain financial obligations with the largest being accumulated tax liability on stock awards, which are taxable at 40% in South Africa.
Therefore in the spirit of full disclosure, I wanted to highlight that over the next year we expect our executives to sell a portion of their holdings to meet their respective obligations. Relatively, we believe that the quantum of shares sold in aggregate for all executives could be 500,000 to 600,000 shares, although the final amount will be dependent on the share price.
Please note specifically, this decision by executive is in no way connected to the performance or prospects of the company. Should any of you have any specific questions around these sales, we are more than happy to address them directly during the Q&A session.
With that, we will gladly take your questions. Thanks, Dylan.
Thank you, sir. (Operator Instructions) Our first question comes from Dave Koning of Baird. Please go ahead.
Dave Koning - Baird
Yes. Hey, guys. Great job.
Dave Koning - Baird
Yes. I guess my first question in the core South Africa business, the underlying growth has been accelerating through the year. I think you said 20% constant currency this quarter. I know that SASSA business itself isn't driving a ton of that growth. It's driving some, but not a ton, what really is causing that acceleration? Is it just transactions through the merchant processing network that are accelerating and does that continue to be really strong through 2015?
Yes. Hi, Dave. You are right. The bulk of the South African transaction processing sort of revenue increase has been the continued adoption utilizing the South African national payment system. Our solution is now fully interoperable, so we find that a lot of beneficiaries choose to use all of the elements of the national payment system available to them, so we have seen quite a uptick in the transaction volumes through other elements of the national payment system. That's the first component.
Obviously at EasyPay, we have also seen some of the growth-driven through new initiatives that we have specifically at EasyPay and new client that we have signed up. Finally, of course, there is also a relatively minor intercompany company or intersegment element to the to the segment revenues that obviously gets eliminated on consolidation, but that in itself is a far smaller part than the growth that we have seen from you just increase adoption of the national payment system as well as transaction growth at EasyPay.
Dave Koning - Baird
Great. I guess, my second question, the financial inclusion business has been growing sequentially significantly by many millions of dollars like every quarter really going back now five or six quarters and I know that's really the loan business and the prepaid airtime business. Will those two continue to drive very strong sequential growth through the next couple of years and are there new products that can be just significant that coming on pretty soon that will drive kind of incremental growth?
David, it's Serge. Again obviously what you are mentioning is 100% correct. There is no doubt that the loan financing business specifically that we are redoing has grown as usually and in our view will continue to grow because there is a demand out there and there is a demand for products at the very, very low costs, which we can provide. That's very, very important.
Two, we talked about airtime, but if we look at what we are doing now in prepaid electricity and we are starting to do with money transfers and we continue to do is simply informative channels. For example, what are my debit order, is it the cheapest for me to go and draw cash from an ATM, it was the top-up product that certainly would extend as a value of the money that our beneficiaries or that our customers actually have.
That type of product is also growing exponentially and candidly we are seeing the same sort of exponential growth as we saw a year-and-a-half ago when we launched airtime, so we believe that the 5 million-odd customers we have right now were independent customers all using our mobile service that number will grow still by a couple of million and the amount of transactions that each one of those customers is performing we believe is going to double or triple over the next two to three years. We really strongly believe that there is a huge growth opportunity.
Then perhaps something that goes back to 2005, when we initially did the road show and I can't remember who was there, who wasn't there, but we defined a very simple principle which we called it the bucket principle and the bucket principle basically was based on the fact that someone's disposable income is put into the bucket and the bucket was just leaks depending on who is actually providing that particular service.
As it doesn't come to us, it goes to third-party. Our job is to obviously plug those and make sure that we are the recipient of those particular products or at least we are the ones that are going to continue to provide all of the products and services that are utilized by the particular customer using the disposable income.
We make it cheaper and obviously that sort of stretches the monies that they have got - which is available through them to do certain things, but more importantly it keeps the money within a particular platform.
Bottom-line is, it's more accessible to them, but it stays within our group rather than actually leaking out to other people and we are still seeing a huge amount of opportunities like I mentioned even for example in the food, certain, certain educational programs and lighting or electricity for that matter that we are currently doing as well in some of our social welfare programs, so there is a huge amount of other things that we have entering into simply to almost that [catch] around everything that is happening with our customer base.
Just to add to that, Dave, as we look at the sequential growth is this specific segment, I think there is just a few other sectors that we need to consider. One of course is that there is an element of seasonality, specifically on the lending side where we see demand increase during specific periods of the year compared to others and that's an element that we have to take into account.
The second one is that we do fund our lending activities very conservatively and very carefully. We only use cash reserves of the group, so there is no external funding involved in the provision of any of our financial services. Obviously, the growth rate determined by what we believe is the applicable amount of available free cash reserves internal to the group.
Then lastly, of course, what could be quite a big driver in terms of the growth of this specific segment will be the introduction of some insurance-based products during the course of fiscal 2015. When that will happen is a function of when our license suspension will be uplifted.
We are working very hard and very diligently on achieving that and we hope that at least for the second half of fiscal 2015, we will be in a position to start offering basic insurance products from a financial inclusion point of view to our cardholder base.
Dave Koning - Baird
Great. One just quick final on is, is the margin now in that business in financial inclusion have been kind of in the high 20s the last few quarters. I know that came down quite a bit from last year just - the hyper growth in prepaid stuff, but are we at kind of a base level now in the high 20s? Is that pretty sustainable?
I think so. I think, over the last year there has been quite a big expansion in the cost base of the business, the biggest component of this was the employment of around the 1,000 staff members. I think, we have kind of reached the plateau in terms of the number of people that we need to employ. We probably still need to employ a few more, but certainly not another 1,000, so I would expect our margin to stabilize at around the level where it is currently at plus or minus 200 basis points over the next fiscal year.
Dave Koning - Baird
Great. Thank you. Nice job.
Thank you very much.
(Operator Instructions) Our next question comes from Russell Anmuth of Gotham Holdings. Please go ahead.
Russell Anmuth - Gotham Holdings
Hi, guys. All of the quarter numbers certainly speak to themselves. Question one, I am wondering if, Serge, if you could just elaborate on the on MasterCard conversation a little bit. I am not sure if I got that from your presentation. Where you stand with MasterCard and how you are still working with them.
Yes. With pleasure, I think what I tried to say in my presentation is that as you know MasterCard is a massive organization that have other fingers in the pie in many, many or in fact just about every country in the world, but they are not necessarily going to be what I call the softest company to execute anything, so they love our product of course in South Africa.
They are definitely without the shadow of a doubt many other countries that have looked at what we have done , we and our team, and we have made a decision that if we go into another country, we would go in with MasterCard simply because we see them as a very easy entry from a political point of view for lack of a better word. They have got the power, they certainly have got the contacts at central banks at governmental level and we have at the end of the day, we have the stake.
I would like to say they have the sizzle and we have the stake. Two of us, we certainly have got a fantastic offer, so many times now do we talk to them more and more often that we are entering into tenders with them. A lot of them at the moment are tenders which are more geared around the social welfare space.
For example, school programs, or control of management distribution, being it HIV AIDS products et cetera, we obviously want to try to move that a little bit away from simply what I would call is the donation world, but rather the business world, but there are many opportunities.
The other decision that we have made is due to two things. In countries where we are not or we have no real business interests at this point in time, we would only enter these countries together with MasterCard. In countries, where we already are then is the reason why we now drive our UEPS/EMV directly ourselves knowing that MasterCard will support a license to whatever local banks happen to be a MasterCard user in that particular territory, so that's what we have decided to do simply because we see longer term huge opportunity to work with MasterCard, but we are rather rely on ourselves to drive the three months, six months, nine months growth in financial numbers.
Russell Anmuth - Gotham Holdings
Okay. Are there countries that actually have this sincere interest in the MasterCard UEPS solution which as you noted in payroll payments infrastructure?
There is absolutely no doubt that they are a number of countries, because if they are not, then they use IT department, they would be wasting a lot of their time answering tenders, so there is no doubt in my view, but like I mentioned because a lot of these products are driven not directly by bank, which has MasterCard license in that territory, but often by organizations which sort of organization that are providing things for example like a food assistance, which means it's not only a bank that's doing it, so you - to a fourth-party agreement that the MasterCard and us, it's a food program and its local bank which makes it a little bit more complicated and candidly in my view makes it at least the selling cycle which is three to six months longer than - that's why we have made the call to say when they happen, I think those things are going to fall down like dominos. I think, while one of them is actually doing it in one country, if they for example food program in 23 countries, we won't get one. We will get all 23 and that's the think that that is going to happen.
Right now, how much of those numbers, it's cut into the 190 plus that Herman is talking about I would think is zero, right? Just to be complacent on it, so when it happens happen, that is something that's certainly in our view is going to help us to grow even faster.
Russell Anmuth - Gotham Holdings
Okay, so when we construct deals like this in other countries with MasterCard, do you envision putting roots on the grounds so to speak in deploying the infrastructure like you did in South Africa or these are going to be projects that you do with partner, where you are you contributing technology and receiving margin royalty technology-type sharing payment?
Once again it's a fantastic question. You should totally come and work for us actually, because you are asking the right questions. We have tried a number of these models, and right now we know that in South Africa, we can be on the ground because we know the country, we know the culture, and we know the people.
Korea, we can do the same thing, but right now we can do the same thing. In media, we can do the same thing. Are we going to be able to do that in all countries, the answer is probably not. If that's the case, we would be more like a technology provider or technology partner than the actual on the ground implementers.
Now, to some extent that doesn't suit my own sort of ideas, because I think we are extremely good implementers and candidly we would have to try look for other company like ourselves that they have got the capacity and the capability to be able to rollout this massive products as well and as fast as we have done so, so I have got a feeling that when we do, do that in these country number one of the possibility would not be anywhere as high has what has been in South Africa.
Number two, I think the projects will take substantially longer, probably in my view 50% to 75% longer than what we've been. Is it a best thing? Probably not, because with a bit of luck, we should be able to run two, three, four or five or six at the at a time rather than one, so cumulatively I think it will be just as good if not better and of course it will give us more countries to sort of split our risk into rather than to be let's call it South African-centric, hopefully we will have five, six, seven or 10 different country that are doing similar thing, so we got plans with all that.
Are we going to change our minds or not, that will depend on the country at that time and it will depend how successful we can find a local partner or not.
Russell Anmuth - Gotham Holdings
Okay. Thank you. Just one more and I will get back in line. Could you expand a little bit? Obviously, because that would be very - anything with MasterCard, anything new countries to be an extraordinarily exciting and welcome.
On the India front, I am not quite sure if I got it exactly. What Dhruv has been working on putting together and constructing as such is it mobile, is it strictly on the MVC side or is it something that you have been more a broader and deeper?
It's a little bit broader than that, because obviously we don't want to go with only one product, but at the moment the two deals that will become visible, certainly all adds MVC as a component. There is absolutely no doubt about that, but there are a number of other products like we have done Malawi, which is we had launched airtime product. That's also incorporated into our Indian sort of overall strategy, but also we are also looking at Ueps in India as well as an alternative payment system, simply because right now you are probably aware of the fact that candidly they do not have specifically one that is biometrically-based and worked in an offline manner.
Specifically one that can then interoperate using MasterCard is an example as the interoperating brand, so we are moving in with what we know we can do immediately, but the idea is not to stop at what we do first phase, is to continue to add and to continue to putting more and more of our products once we got the customer base.
Russell Anmuth - Gotham Holdings
Okay, so India will not be a terrible market for the country, right, 1 billion people. How does that work, let's say, if we can move towards more full UEPS implementation. Do you think that's something that goes province-by-province? How do you view that from a top level?
In my view, when we people get excited about India, because they have 1.3 billion people, we also get excited because you multiply anything by 1.3 billion, sounds like a big number, but I think people that think like that - well, we unfortunately the amount of money you are making per person is actually very much lower, so business that would be done province-by-province there is absolutely no doubt in my mind, but when we are looking at the only thing that can be ubiquitous across all of India, it has to be a mobile solution because that is something that does not require necessarily any other piece of hardware or terminals or ATM or do requires the firms and the funds are available, so we are going to try to drive it the opposite way that we did in the past.
Before there were no funds, so we drove it from [cell] and new UEPS. Now we have got the fund, we can drive it from mobile and then the UEPS becomes more of a supporting infrastructure or complementary infrastructure rather than the original one, so the model is going to be a little bit different, but first we are going to go for volume, low margins, but at very low cost of entry drives the customer acquisition, drives the profitability per customer and then start investing more money into what I would call is more hard way and brick-and-mortar infrastructure not the other way around.
Russell Anmuth - Gotham Holdings
Okay. It's very exciting right? You can take advantage of the mobile platform, right, in that way and much less expensive, so how does that lay out though if you look at the competitive landscape for example. You have your unique solution. Such as in South Africa, does that competitive advantage and uniqueness translate onto a mobile phone infrastructure where there's lots of right you read about lots of different companies. It's about everyday that are trying to do little things on a mobile phone platform.
Your point is again is 100% right. We know everybody every day. I mean, our read what people what send me documentation about that makes mobile wallet. Candidly I still haven't understood what most of those things actually do. All I can tell you is that the one we launched 18 months ago, in 18 months we got 5.3 million clients that are using it. I don't know anybody else that's got 5.3 million clients in South Africa that are using that particular wallet on a day-to-day basis.
When we launched Malawi four months ago, we are doing 200,000 transactions a day. I don't know any other body that does that, so I am sure that there are other people with competitive products. Candidly, and fortunately rightly or wrongly, and I apologize for that - upsetting one, but I have never really looked around all the time to actually see who can do something better than we can.
We have always been a technologist and we believe that our solutions, our business model, our ability to implement on average is going to be better than most, so for what it's worth that's the way we have always looked at things.
Russell Anmuth - Gotham Holdings
When you mentioned the digital, the mobile law just to fly over a little bit for a second, you spoke in the past about incorporating, I think it's the MVC within the digital wallet that's been under development by the largest mobile phone handset company in the world. Is that still an ongoing project?
That's done. That is something that we are looking forward to actually certainly launch in a very, very big way in the next 12 months, so just give me one second. We are working with a number of operators, but again like I said in my little - we are independent. We are agnostic to any of those particular people.
In other words, nowadays, do we want to work with the operator? Yes. Do we want to work with the cell phone manufacturer, yes and we are working with a number of them.
Do we want to be depending on them? The answer is no. Do you want to be dependent on the actual network? The answer is no. Today - like 10 years ago, where you needed to know the SIM card, you needed to know how to work with a phone, you needed to have access to operating systems.
Today, all of that is actually available and basically open source which means we can pretty much do whatever we want and drive our solution directly to the customer, which is again what I have said in my strategy is that the board has made a decision that we are going to go ourselves for customer acquisition directly rather than to go through the operators, rather than to go through the cell phone manufacturers. It's a little of change of approach, but it doesn't mean we can't do both.
Russell Anmuth - Gotham Holdings
That is for example largest mobile phone handset maker's product, right? Doesn't that help exposure, drive usage?
Of course it does and that will be fantastic if we can end up by doing a deal with one of those. I don't know if you remember, but a couple of years ago, we did the deal with a mobile operator in United States and they were doing exactly that. We ended up by having MVC amounting to 203 million funds.
At the end of the day, sure, we added on the funds, but very people were using it, so I want to try if possible to remove what I would call the normal marketing for lack of better word - upward adjust for the word, but the bullshit part.
When people talk about saying gees, we have this application everywhere. I would rather have a 100,000 people that use it rather than 10 million people that have it like I have got so many on my phone. I couldn't even tell you what they are.
Russell Anmuth - Gotham Holdings
Okay. That's kind of where I was driving to understand.
You got it. You are certainly in line with what we are thinking.
Russell Anmuth - Gotham Holdings
Thank you very much.
(Operator Instructions) Our next question comes from Dave Koning from Baird. Please go ahead.
Dave Koning - Baird
I guess a couple of things on I think just the balance sheet and share count. One is, now that you significantly ramped the loan book, I mean, is it far for us to kind of look at that. I mean, those are receivables that's really going to be if you ever liquidated. That's your cash, I mean, that's value to the company. We often just look at your usable cash, but I mean is it fair for us to think about that like a true balance sheet value as you truly owe that money, right?
Right. David, it's a short-term. If I had to coin a phrase, it's a short-term cash equivalent instrument. None of our loans have a longer tenure than six months, so the average outstanding period on the lending book is probably at any given point in time between four and five months, so you can you definitely sort of look at the receivable balance as a quasi cash equivalent.
Dave Koning - Baird
What, if the loan experience I remember from the past is extremely good, right? I mean, your collection rate is like 99% or something, right?
Yes. We have a very rigorous process that we have put in place and that we require our stock members adhere to. There is a comprehensive affordability study that is done before any credit is granted, so we are very fortunate that our bad debt experience has been quite low compared to most of the other operators in this area.
David, just to give you a little bit of color on this legal. There is also a reason for that and the reason for that is because we don't simply believe really just grant loans to people. This happened to one point. We are a little bit more specific about what loan do they want and for what reason do they want the loan and we are driving our entire sales department to actually make sure that they understand the need for the loan, so we can actually make sure that the loan is paid directly to the person to whom the money is going to go to and we are able then to negotiate these loyalty schemes with them and been able to then be a lot cheaper for the guy that is actually requiring the loan, so we tend to focus on women number one, because they normally look after the children and they are more responsible.
Number two, we look after educational loans, medical loans and any emergency loan. These are the one that are the key to actually improving the lives of people and that's why these people are always prepared to repay the loan, because they actually happen to be the responsible part of the market.
Dave Koning - Baird
Yes. Got you. Okay. Then one other thing, because you kind of gone through the hyper growth period of that lending business, now the cash flow dynamics now that that's continuing to grow well, but not probably quite as fast, it seems like the cash flow dynamics are getting better. I mean, you know really nice sequential growth in your cash. Why won't you almost go and buyback general Atlantic and just get that any selling pressure there just to get that out of the way? Then also just buy back shares from you guys individually that need to cover the tax, because just get all that selling pressure kind of out of the way given just a big momentum of the bid?
It's a great point, David, and obviously something that we that we are considering internally at the moment, looking at our cash flow forecast, you are correct. The lending book really took a big bite out of the free cash flows for the last 12 months as our book has now seasoned for lack of a better word at least once probably close to being seasoned to second time, the cash flow generating dynamics of the business in its entirety is probably such that we can now consider using the cash specifically on the repurchasing side if it makes for us.
As I mentioned, we just bought back 1.8 million shares from our BEE partners for cash, so it's certainly something that is at the forefront of our mind when we consider what the best use is of our surplus cash would be at this point in time.
Dave Koning - Baird
Okay. Great. Thank you.
Thank you. Ladies and gentlemen, on the half of Net 1 Ueps Technologies Inc., that concludes this conference. Thank you for joining us. You may now disconnect your lines.
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