Net 1 UEPS Technologies, Inc. (NASDAQ:UEPS) Q3 2018 Earnings Conference Call May 11, 2018 8:00 AM ET
Dhruv Chopra - Head of IR
Herman Kotzé - CEO
Alex Smith - CFO
Allen Klee - Maxim Group
John Flynn - WEDGE Capital Management
Will Settle - Woodmont
Good afternoon, ladies and gentlemen, and welcome to Net 1's UEPS Quarter 3 2018 Earnings Conference Call. All participants will be listen-only mode. [Operator Instructions] Please note that the conference is being recorded.
I'll now hand the conference over to Mr. Dhruv Chopra. Please go ahead, sir.
Thank you, Judith. Welcome to our third quarter 2018 earnings call. With me on the call today is our CEO, Herman Kotzé; and our new CFO, Alex Smith. Our press release, Form 10-Q and supplementary financial presentation are available on our Investor Relations website, ir.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 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've 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 analyzed 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.
We will have a question-and-answer session following our prepared remarks. So with that, let me turn the call over to Herman.
Thank you, Dhruv. Good morning to all our shareholders. In our first quarter, in an almost post SASSA world for Net 1, we have multiple emotions to deal with. On the one hand, now that the Minister of Social Development, Mr. Susan Shabangu has made it abundantly clear that CPS will not be playing a role in the distribution of social grant as a contractor to SASSA beyond September 2018, we have the visibility to be able to plan for a wind down of CPS, and focus our energies on our Fintech and financial inclusion solutions for the financially excluded citizens of South Africa as well as internationally, no longer burdened by our constitutional and organ of state obligations, in a sometimes hostile political and public environment.
At the same time, we are proudly South African, and are incredibly gratified to have run one of the world's largest and most successful social grant distribution programs, paying on time and without disruption for the past 6 years, while using our biometric technology to save the South African treasury over ZAR 2 billion per year for the past 6 years, as validated by SASSA in their annual reports. We finally have the freedom and bandwidth to focus on our financial inclusion initiatives in South Africa and abroad, that we expect will return Net 1 to being a consistently profitable growth company without being burdened by fixed term contracts or with political or other motivations. The steps and actions we have taken to drive the new Net 1 are meaningful, and we expect to deliver tangible benefits of our strategy starting within our current fourth quarter.
In the short-term, we have positioned our South African businesses, including Moneyline, Smart Life, Cell C and DNI to drive increases in our financial inclusion businesses, and internationally the restructuring and refocusing of IPG is expected to continue to sustain its recent growth trajectory. With our execution, we hope to rebuild the confidence and credibility in our business and strategy, and return Net 1 to the echelon of leading International growth companies.
Before delving into our future, let me spend a few minutes on the current state of affairs with CPS and the distribution of grants. As you are aware, the constitutional court extended our contract with SASSA for a period of 6 months through to September 2018, for the distribution of social grants to the approximately 1.9 million beneficiaries who are currently paid at pay-points and are classified as cash payment beneficiaries. This extension is on the same terms and conditions as the previous contract.
However, because the distribution of cash payments is the most expensive component, the ConCourt permitted us to approach National Treasury to request an increase in our fee for this portion of the business. We did so at the end of March, and last week treasury proposed that we be paid approximately ZAR44.35, excluding VAT per grant recipient for the 1.9 million people paid at pay-points, and ZAR16.94 per grant recipient for the 1.1 million people paid through our biometric ATM and point-of-sale networks. We believe that National Treasury's recommendation does not take SASSA's stated plans regarding volumes into account, and does not recognize the need for us to maintain our infrastructure regardless of the number of beneficiaries paid. And we have therefore asked the Constitutional Court to refer the matter back to National Treasury.
The Constitutional Court order only dealt with the 1.9 million people currently paid at pay-points and were silent on the remaining 8 million grant payments in accordance with SASSA's request to the court. We presume that SASSA did not ask for an order pertaining to the other 8 million people, as the agency assumed that these grant recipients will be paid directly into their bank accounts, which are currently predominantly underwritten by Grindrod Bank and managed by our banking system, and that the South African Post Office would be able to assume responsibility for this base effective April 1. However, SASSA and the Post Office were in fact not ready or able at that time to take over the distribution of grants. And we stepped in to fulfill our organ of state responsibilities to the beneficiaries by continuing to ensure that people got paid on time and without issue, as they were accustomed to.
The challenge, however, is that the provision of these services and infrastructure comes at a cost. And with SASSA no longer paying for the service, our banking partner Grindrod was left with no choice, but to levy a fee on the end users to ensure that relevant costs would be recovered and to provide the service, for which it has been publicly vilified. The only other option would have been to close the accounts, but that would have disadvantaged the people who matter the most, namely the beneficiaries, and would have resulted in significant disruption in the payment system. You may recall from our last earnings call that SASSA advertised the new tender in January for the payment of grants at pay-points for a 5-year period commencing when our contract terminates in September. SASSA had to publish this tender after the Post Office conceded that it is unable to fulfill this particular function.
We participated in the tender process on the basis of being an outsourced technology and logistics provider. Around 2 weeks ago, the Minister suspended the evaluation of the tender due to objections received regarding the completeness of the tender document from a prospective bidder who did not file a tender response, as well as the fact that the appointed bid valuation committee did not have the required skills to evaluate the tender of this nature. We do not know when or if the tender process will resume. But we are unlikely to continue with our participation if there are reputational, legal or financial risks that may result in repeat of the events we've had to endure over the last 6 years.
Therefore, to summarize, we will continue to provide our support to government, the ConCourt, and most importantly to the beneficiaries through to the end of our contract extension in September 2018, and beyond that, we will focus our attention, resources, infrastructure and services on the unbanked population of the country. That brings us to where we are today at the cusp of an exciting new chapter in Net 1 story and more importantly where we are headed in the future.
As we have highlighted over the past 2 quarters, the further expansion of our EasyPay Everywhere or EPE offering branch and ATM infrastructure and product set has already begun to gain traction. During the third quarter, we saw a meaningful improvement in all our key components, driving positive growth and momentum. We expect this to accelerate in the fourth quarter and in fiscal 2019.
As of this morning, we have reached 2.7 million EPE accounts compared to 1.95 million a year ago. Our branch infrastructure of 150 branches is likely to expand meaningfully over the next 12 months and our 1,100 ATMs are also expected to double over the next 12 to 18 months.
In addition, all of the infrastructure we have, that has been dedicated to servicing SASSA, will become available to redeploy as we phase off the contract and will ensure that for our target market we will remain the largest retail bank service provider, the largest lender, the largest life insurer and value-added service provider in the country. To supplement our expansion plans, we have also commenced the nationwide marketing campaign across radio, print and digital channels.
In addition to banking and financial services products, starting in early May, we also launched a new lifestyle product which incorporates effectively priced voice, data and content services from Cell C.
In addition to our fixed ATMs, our mobile cash dispensers are now also EMV certified and can accept debit transactions from cards issued by any other bank. Incremental steps that we have already taken to drive our financial inclusion efforts forward, includes the initiation of the certification process for Finbond to become a certified issuer of UEPS/EMV cards through their 430 branches nationwide, which we expect to be completed in the next 3 to 5 months. And additionally working closely with DNI to leverage their direct sales force of 2,000 people, mostly urban focused compared to our current rural footprint, to cross-sell each of our services nationwide.
To summarize our financial inclusion opportunity in South Africa, we believe our total addressable market, including those of our Finbond and Cell C Associates is approximately 10 million to 15 million South Africans, and average ARPU on each transactional account should exceed ZAR25 per month. Our first target would be to achieve 50% penetration within 18 months.
While on South Africa, I will now discuss Cell C and DNI, and how they tie into our group strategy. Starting with DNI, which as you know, we currently own 49% of, and pending confirmation from the Competition Commission, when we increase our ownership to 55%, DNI will become a subsidiary and we will consolidate the business.
For clarity, should DNI be consolidated, their revenue and profits will flow through our income statement. And to reiterate the quantum of DNI's business today, for the 12-month period ending June 2018 on a stand-alone basis, DNI expects to generate revenue of ZAR1.6 billion to ZAR1.8 billion or $134 million to $150 million translated on our Q3 2018 exchange rate, and a net profit after tax of approximately ZAR 220 million to ZAR 250 million or $18 million to $21 million at our Q3 2018 rate.
Cell C has made tremendous strides post its recapitalization with meaningful advancements in new products and gains in market share, revenue and profitability over the past 6 months. Its management expects to continue maintaining its growth trajectory in advance of the anticipated listing of the business sometime in early 2020. On the Net 1 business side, we have just launched 2 newly defined Cell C bundled products to our customers that provide tremendous value to users, while also pursuing cross-pollination of each other's distribution networks.
Additionally, during Q3 2018, we delivered our first order of 1 million SIM cards to Cell C, and we have received a further order for 5 million SIM cards. I want to highlight one further growth initiative in South Africa before shifting focus to our International efforts, which revolves around our cryptographic and prepaid utility vending solutions. Several years ago, we traversed the subject of STS6, which is the industry standard for prepaid token vending and which was developed by Net 1. While we have made the standard available on an open source basis, we have a significant first mover advantage in providing the interface that allows utilities to generate tokens on a recurring fee basis.
This standard will no longer require utilities to physically and logistically swap out the actual prepaid meters in tens of millions of households all over the world, as they come to the end of their life cycle. We are, therefore, now at the start of a multiyear upgrade cycle by all of these utility companies. And in Q3 2018, we have kicked off this initiative by contracting with Eskom, the largest utility company in South Africa and Africa. Our solution will be demonstrated by this industry body, the STS Association at the Africa Utility Week later this month.
Moving on to our International business. Last quarter, we commenced with the restructuring of the group's International assets into a comprehensive end-to-end payments provider, currently known as the International Payments Group or IPG internally. This business now incorporates Masterpayment Germany, Masterpayment Financial Services, Net 1 Malta, Transact24 and our investment in Bank Frick. The IPG management structure is now in place under the stewardship of Philip Meyer, and non-core activities under its new strategy have been discontinued or sold.
During Q2 2018, we decided to exit this working capital financing business for non-payment solutions customers and sold the remaining book to Bank Frick in Q3 2018. This quarter, we also agreed to part ways with the Masterpayment management team and subsequently discarded their initial business plan, which focused extensively on a rapid expansion of the working capital business. As a result of the change in Masterpayment strategy towards the payment solutions focus of the IPG group, we decided to take a non-cash impairment charge against its goodwill.
We saw meaningful volumes in our cryptocurrency processing business through January, through volume subsequently tapered off in the quarter following certain news and events in the cryptocurrency space.
We continue to see heightened demand from other cryptocurrency exchanges as well as ICOs, and we will continue to focus on A: the provision of services; and B: manage on the opportunity pipeline to limit volatility for the company.
IPG's core offerings such as China processing volume, prepaid processing and SEPA payments all saw meaningful growth during Q3 2018. T24 has applied for China UnionPay membership for both issuing and acquiring, and we expect to receive approval during the next 2 months. IPG's new multicurrency issuing platform, called Kaleidoscope, and card management system are expected to be complete during the first half of fiscal 2019 and is expected to provide differentiated products to our target markets and in turn kick off IPG's execution under its new strategy.
Bank Frick reported its year-end results recently, and net income of CHF6.3 million almost doubled from the year before, while assets under management increased over 25%. It also became the first bank in the Swiss franc area to issue a certificate based on cryptocurrencies, launched custodial services for professional cryptocurrency investors and has supported over a dozen initial coin offerings or ICOs as custodian bank, with Masterpayment providing the payment processing for these events. Bank Frick is now investing heavily in its blockchain division and expects to increase its staff count by 50% in 2018 to capitalize on this opportunity. It is a little known fact that Switzerland and Liechtenstein are very important blockchain technology destinations, with around 400 blockchain businesses active at the moment, mainly because of the stable and progressive governments and regulators.
Bank Frick has built a solid reputation as a major player in the blockchain space across Europe and has access to all the essential players like KYC and anti-money laundering providers, smart contract developers, consultants, lawyers and marketing companies. We offer not only bank accounts and payment processing to the ICOs, we also offer a cost storage solution for their tokens and have access to different liquidity providers, and can therefore easily change their cryptocurrency to fiat currency. The main focus is to build up a fully regulated blockchain infrastructure in Liechtenstein that covers all needs of participants in the blockchain field. Beside all classical banking services, this includes fiat clearing, safe crypto clearing, safe crypto custody and an exchange to list all tokens coming out from new blockchain business models or ICOs.
IPG and Bank Frick, supported by Net 1's IT expertise, are in the process of developing 2 new blockchain solutions, which we expect to start commercializing later this year. The first revolves around a new generation of highly secure, but easily accessible crypto asset cold storage solution for crypto asset investors and exchanges, utilizing Net 1's core cryptographic biometric verification and hardware security model knowhow, and the second utilizing smart contracts to revolutionize large capital-intensive financing businesses. We will provide more details on our year-end call as the technical solutions and commercial models are further refined.
In India, our launch of VCC or our Virtual Credit Card had been delayed due to the central bank's new guidelines on KYC, which came into effect on March 1. However, I'm pleased to state that we have now addressed all the changes and the Android version of the MobiKwik app with VCC went live on April 19, while the IOS version went live on April 30. In the first 2 weeks, we have already signed up 15,000 new users and this small base has already doubled our daily transaction volume. We will provide further progress updates as we get more data in the coming months and quarters. During Q3 2018, we've also became a VISA-certified ACS service provider in India.
We continue with our analysis of International UEPS/EMV opportunities, and we are in the process of refining the opportunities we have identified in terms of timing, size and execution time lines. During the third quarter, we evaluated potential projects in at least 3 new countries across Africa and Central America.
Lastly before I hand over to Alex to discuss the financials, let me give you an update on Korea. As we have noted, we continue to see volume growth, driven by market share gains as smaller players are squeezed out due to the regulatory changes in pricing. But our top line growth remains under pressure as negotiations between the issuers, VAN companies and agents are still ongoing. We have seen very good traction with KSNET's non-card VAN businesses, namely the banking VAN, payment gateway and working capital finance businesses, but these are not big enough yet to turn revenue growth positive. Our expectation is that these negative pricing adjustments will continue to be a drag on KSNET's reported results through calendar 2018, before returning to low single-digit revenue growth in 2019.
There are many variables that may influence the usual linear correlation between revenue growth and EBITDA, especially the outcome of negotiations with card issuers and agents. But we do expect the lag between revenue and earnings growth due to the timing of these various events.
To continue our commitment to engage with our shareholders, I look forward to meeting some of you in New York next month. I am also delighted to welcome Alex Smith, as our new Chief Financial Officer, who came on board on March 1. Alex will now go over the financial performance and metrics in more detail before opening it up for Q&A.
Thank you, Herman, and good morning to all our shareholders. I will discuss the key results and trends within our operating segments for the third quarter of 2018 compared to a year ago.
For Q3 of 2018, our average Rand dollar exchange rate was ZAR11.95 compared to ZAR13.22 a year ago, which positively impacted our U.S. dollar-based results by approximately 10%.
Revenue of $163 million in Q3 2018 was up 10% year-over-year in dollars and down 1% in constant currency. Our fundamental earnings per share increased by 101% relative to Q3 2017, on a constant-currency basis and includes a fair value adjustment net of tax related to our Cell C investment of approximately $0.52. We recognized a noncash increase in the value of our Cell C investment due to its improving profitability, driven by double-digit top line and subscriber growth as well as new products.
This amount has been included in fundamental earnings, because we believe it is appropriate for the returns generated from this significant investment to be included in any assessment of the company's performance.
Our quarterly results were adversely impacted by an impairment loss of $19.9 million related to Masterpayment and Masterpayment Financial Services goodwill as a result of the change in its business strategy to refocus on transaction processing as part of the International Payments Group.
The management team is now focused on delivering the IPG strategy as discussed by Herman earlier.
By segment, South African transaction processing reported revenue of $74 million in Q3 2018, up 15% year-over-year in U.S. dollars and 4% on a constant-currency basis. The growth in this segment revenue was primarily due to a higher number of EPE accounts and ATM transactions. Operating income and margin decreased primarily due to an increase in intersegment charges, the impact of annual salary increases in October 2017, increases in goods and services purchased from third parties, and declining profitability at CPS given the fact that its monthly fee per grant recipient has been fixed for the last 6 years.
Our operating income margin for Q3 2018 and 2017 was 17% and 24%, respectively. Given our current visibility, we expect our South African transaction processing segment margins to remain in the 15% to 20% range for the fourth quarter of fiscal 2018.
International transaction processing generated revenue of $46.2 million in Q3 2018, 11% higher than in Q3 2017. The increase in segment revenue was due to an increase in processing activities particularly related to Masterpayment's cryptocurrency processing launched in December 2017.
Operating income during Q3 2018 was adversely impacted by the impairment loss, lower operating income in Korea as a result of the impact of changes to regulations governing the fees that maybe charged on card transactions, restructuring costs and severance payments at Masterpayment, partially offset by an ad hoc refund of indirect taxes of $2.5 million in Korea. The operating margin for Q3 2018 was negative 32% compared to a positive operating margin of 5% in Q3 2017. Excluding the Masterpayment impairment and the refund of indirect taxes, segment operating income and margin were $2.4 million and 5%, respectively. For Q3 2018, KSNET's revenue increased by 1% in Korean won to $38.9 million, while EBITDA margin declined to 18% compared to 21% in Q2 2018 and 26% last year after excluding the benefits of the $2.5 million refund of indirect taxes. This reduction was due to the changes in Korean regulations, as previously communicated. As Herman stated, we expect this impact to continue to have an adverse effect on reported results for the remainder of calendar 2018.
Looking forward, we expect the operating performance to stabilize in calendar 2019, although the regulatory landscape remains challenging for the VAN companies in South Korea. While CapEx in Q3 2018 was higher than the last quarter, this was due to expenditure on IT equipment and back end infrastructure, and we expect CapEx to return to the below historical levels experienced in the first half of fiscal 2018. As Herman discussed, we see a substantial opportunity in processing in the cryptocurrency space, and we saw some of this potential in the Masterpayment revenue growth experienced in Q3 2018. This combined with the other opportunities in IPG can lead to a greater contribution from this area, as we gain the operational leverage from increasing transaction volumes, though this is currently a relatively small contributor to the group results. For perspective, the business units that make up IPG, grew revenue by 56% year-over-year in Q3 2018, and now account for almost 15% of this segment's revenue compared to 10% in Q3 2017. Our financial inclusion and applied technology segment revenue was $60 million in Q3 2018, up 5% in U.S. dollars, but down 5% compared with Q3 2017 on a constant-currency basis.
In South African Rand, segment revenue decreased, primarily due to fewer prepaid airtime and other value-added services sales, partially offset by increased volumes in our insurance and lending businesses, and an increase in intersegment revenues. Operating income was also impacted by these factors as well as an increase in the allowance for doubtful finance loans receivable resulting from a commensurate increase in our lending book. Our gross lending book, comprising of capital out and deferred service fees at the end of Q3 2018, was approximately ZAR1.2 billion compared to ZAR942 million at the end of Q4 2017. We have not grown the lending book sequentially during quarter 3, as we further refined and tightened our lending criteria to manage our credit risk. We continue to believe our financial services offerings will sustain this segment's growth, along with commensurate expansion of our branch and ATM infrastructures.
At April 30, we had approximately 2.6 million EPE accounts. Our life insurance business, Smart Life, continues to sustain its momentum, and we've sold more than 500,000 policies at the end of April, making us one of the largest insurance providers to this market segment. Operating income margin for the financial inclusion and applied technology segment was 25% during each of Q3 2018 and 2017, and was impacted by fewer low margin prepaid product sales, improved revenues from our insurance businesses and an increase in intersegment revenues offset by annual salary increases granted to our South African employees. The operating margin in this segment will continue to be affected by the relative contributions of the various businesses in this segment and the adoption rate of our various financial services products.
Corporate expenses have decreased, primarily due to lower transaction-related expenditures and lower executive compensation, which was partially offset by a modest increase in Rand-denominated goods and services purchased from third parties and director's fees. Our Q3 2018 net interest income decreased to $2.7 million, with high interest expense, driven primarily as a result of the South African facility we obtained to partially fund our investment in Cell C and DNI, somewhat offset by higher interest income reported due to interest recorded from a listed note. We recognized earnings from equity accounted investments of $4 million during Q3 2018 compared to $50,000 last year. DNI and Bank Frick contributed for the full quarter. However, because Finbond is listed on the Johannesburg Stock Exchange, we only include its reported 6-month results during our first quarter and fourth quarter.
We currently own 49% of DNI, but have agreed to subscribe for a further 6% of the business, which is subject to approval by the South African competition authorities. In the event that the transaction is approved, which we hope will occur before the end of the fiscal year, DNI will become a subsidiary of Net 1 and its results will be consolidated going forward. DNI's income contribution to equity income would then reduce correspondingly. Capital expenditures for Q3 2018 and 2017 were $4.2 million and $1.9 million respectively, and have increased primarily due to the acquisition of data processing computer equipment in South Korea and ATMs in South Africa, while partially offset by fewer term loan sales in South Korea compared with 2017. We continue to expect our quarterly 2018 capital expenditures to be lower than in 2017.
At March 31, 2018, our cash and cash equivalents were $87.2 million. The decrease in our cash balances from June 30, 2017, was primarily due to our investments in DNI, Bank Frick, Cell C and a $9 million listed note, scheduled repayments of our South African long-term debt, the unscheduled repayment of our Korean debt in full, the repayment of our European short-term facilities, the growth in our South African lending book and capital expenditures, all of which were partially offset by cash generated by most of our core businesses.
Apart from our lending arrangements, we continue to fund the group's operations and capital investments utilizing our cash reserves and cash generated from our business activities. We expect the majority of our cash generated in fiscal 2018 to be used to repay principal and interest under our South African lending facilities and to fund our internal growth investments.
As of March 31, 2018, we had outstanding long-term debt of ZAR897.5 million under our South African facilities, comprising ZAR687.5 million under facilities A and B, and ZAR210 million under facility D. Interest due on the facilities is based on the Johannesburg Interbank Agreed Rate or JIBAR plus a margin of 2.75%.
Principal repayments on the outstanding facility A and facility B loans are due in 5 quarterly installments, which comprise a ZAR187.5 million payment in June 2018, and 4 payments of ZAR125 million each thereafter.
Principal repayments on the facility D loan are due in 8 installments, commencing in June 2018, and are ZAR26.3 million per quarter assuming we complete the investment into DNI. Voluntary prepayments are permitted without early repayment fees or penalties.
Our Q3, 2018 tax expense was $10.9 million compared to $10.2 million in 2017. Our effective tax rate for fiscal 2018 was 106.3% and was higher than the South African statutory rate as a result of the impairment loss, non-deductible expenses, which include transaction-related expenditure and non-deductible interest on our South African long-term facility, and the impact of the changes in U.S. federal statutory tax law.
We continue to expect our effective rate for 2018 to be in the 34% to 36% range, excluding the impact of the impairment loss and the valuation allowance related to the 7.8 million doubtful accounts allowance recorded in Q2. Our weighted share count for Q3 2018 was 56.8 million versus our actual March 31 share count of 56.8 million shares. Compared with Q3 2017, our weighted share count was higher due to the inclusion of 5 million shares sold in Q3 2017.
To conclude on guidance and to reiterate from last quarter, we anticipate our fundamental earnings per share for fiscal 2018 to remain at least $1.61. Our guidance excludes any fair value adjustments related to available-for-sale assets and assumes a constant currency base of ZAR 13.62 to the dollar, a share count of 56.6 million shares and a tax rate of between 34% and 36%.
Including fair value adjustments, we expect our fundamental earnings per share to exceed $2 in fiscal 2018. For clarity, our guidance as always is on a constant-currency basis and does not reflect the recent strengthening of the South African Rand. We can now open up the call for Q&A.
Thank you very much, sir. [Operator Instructions] The first question comes from Allen Klee of Maxim Group.
Yes, good morning. Can you talk a little about your EasyPay offerings and how they compare to - what's the competitive advantage you have? And how you think about the ability to continue to grow it, if there is any change in the competitive environment as the Post Office will be offering cards to some of the other population that you had served?
Sure. Thanks, Allen. I think, the first thing to understand on the EasyPay Everywhere, the EPE offering, is that we already have a base of 2.7 million cards. So we're already a substantial player in this space. It's a well-known product. It is a well-known brand. We like to think it's a well-respected brand. And there are a couple of things that we believe differentiate our offering from those offered by other institutions, including the South African Post Office.
The first is the infrastructure that we have deployed and that we have available to service our customer base. Most of the South African retail banks over the last decade or so have actually closed down their presence or their branches in the rural areas of the country. By contrast, we have increased our presence. And so most of the 141 branches that we have today, which we hope to increase substantially over the next couple of months, along with the branches from the associates' investments that we have in Finbond, those are all mainly rural and semi-rural based infrastructures. That obviously gives us the ability to be much more visible and to be able to service our customer base much more efficiently and effectively, also allows us to do marketing to those people, right where they live on the ground.
The second thing that we think is one of our compelling differentiators revolves around the pricing for the product. So when we compare ourselves and the bundle of services that we provide to our beneficiaries, they are substantially cheaper than the equivalent offerings made available by the other retail banks in the country. And again, that's a function of us being able to process most of those transactions on us, through our own ATM or our own point-of-sale or our mobile ATM network. And then we've got a number of added, value-added service offerings that we make available. These are the so-called lifestyle products that we've developed over the last 2 years or so.
Again, we believe that, that gives us quite a differentiating edge. To give you an example, we provide free life insurance for every one of our EPE customers up to 2.5 thousand Rand, funeral cover. So that's an additional benefit, which is completely free to the cardholder. And we also provide them with the new products that we defined in collaboration with Cell C, where they have access to what we think is the cheapest voice data and content services available to them right now in South Africa. So it's a combination of all of those that we believe is a compelling offering to the market that we target out there.
Thank you. And then, yes, just following up on the last part of that with Cell C and DNI. It sounded like you talked a little about how the growth opportunity there and synergies with your existing business. Could you just expand on that a little more?
Yes, sure. So DNI in itself, obviously, we hope to have a controlling stake in that business by hopefully the end of this fiscal year, so by 30 June. DNI brings to us a variety of assets and infrastructure that complements what we already have. So within DNI, we've got roughly 2,000 employees. These are employees that are mainly mobile-based, so they travel around in minibus vehicles all around the country to service the greater population. Today they are very focused on the provision of airtime and starter packs, so prepaid SIM cards to the South African population, so they focus on large events, sport events, religious gatherings, et cetera, et cetera. They are very active in the urban areas of the country. Whereas our classic Net 1 infrastructure is more rural and semi-rural based.
So the DNI footprint brings to us a big portion of the urban areas where traditionally we weren't as strong as we had hoped to be. Similarly, from a Cell C perspective, Cell C obviously is one of the mobile operators also operates an infrastructure around the country. It also has branches. It also runs container services. And so over time, we hope to also leverage the Cell C infrastructure, so that between Cell C, DNI and Net 1, through our combined workforces and we're talking about probably 6,000 to 8,000 people, and probably close to 1,000 locations across the country, we would be able to service and to sell all of our products, whether it's a bank company, an insurance product, credit product or an airtime product. And it's only by having this partnership and this relationship that we will be able to actually fulfill what we believe is possible.
Okay. Thank you. And how do you think about longer term ability of these type of offerings and the other things you're doing in South Africa to be able to offset the loss of the SASSA-related revenue and earnings?
Well, in the long term, we believe that it will more than offset the loss of earnings that we will -- SASSA as a result of the severance of the relationship we have with SASSA. So at the moment, the relationship with SASSA is a very simple one. We get paid a fixed fee to do a grant payment, and we are restricted in terms of really performing any other functions with the CPS or the SASSA infrastructure. So effectively we've got 2,000 people today singularly focused on providing a single payment service. Once that is unlocked and we can convert that infrastructure or that workforce, along with all of the infrastructure associated with it in terms of ATMs, in terms of point-of-sale distribution and marketing capacity, we believe that in the very short space of time, we will be able to really replace the revenue and ultimately it's all about the profitability of what the SASSA contract has meant for us over the last 6 years.
Obviously, we understand and I think everybody is aware of the fact that we're not going to be able to convince all 10.8 million current grant recipients that they should convert to a Net 1 product or an EPE card. But we certainly hope that we will be able to convince a significant portion of them. And we certainly don't need to convert the full base in order for us to maintain our profitability levels. Like I indicated, as part of my discussion earlier, at the moment, for the next 12 to 18 months, we're targeting roughly 50% of what we believe the target market is. So the target market is anywhere between 10 million and 15 million people. And so over the next 12 to 18 months, we would like to target 5 million of those and we believe that, that will be more than enough to offset the contractual losses that we will have from SASSA.
Thank you very much, sir. [Operator Instructions] The next question comes from John Flynn of WEDGE Capital Management.
Just had a quick question for you on KSNET. So you mentioned in your comments that you believe KSNET will stabilize towards the end of this calendar year and going forward. But, I guess, we could use a bit more clarity on what that means? The profitability has fallen quite a bit with the changes in the regulations. So when you say stabilize, are you thinking of the current level or is there a normalization of the business and the cost structure that can -- than will happen over the next nine months that will lead to a perhaps higher level of stabilized margins or earnings at KSNET?
Thanks, John. It's a fairly multifaceted question. When we - first of all, when we look at the stabilizing of what's happened in the South Korean markets from a regulatory point of view, we first would like to stabilize the revenue side of the business, the top line. That's obviously where we've seen the biggest impact, simply because the pricing - the price component has come down substantially. We need to supplement that with significant volume growth. So that's the first focus point for us. And we believe that over the next fiscal year, if we look at fiscal 2019, we will be able to at least show some low single-digit growth numbers on the top line, and that's really because of an increase on the volumes rather than an increase in pricing. Also secondary to that, we hope to expand our other core services that we provide. So mainly our banking VAN service, which is really a direct EFT service or - and in addition to that, our payment gateway business. So that's the first focus point for us. There will be, in my view, a delay in terms of the stabilization or really a small marginal increase on the top line. There will be a lag as to how that translates into the EBITDA and operating profit and, obviously, profit after tax lines. That will be determined mainly by the outcome of various discussions that are currently taking place between the issuing banks. They are really the ones who determine to what extent the cut in fees announced by the government is passed down to the various VAN companies and there are 6 major card issuers in Korea, and every one of those is a separate negotiation and discussion. The other leg of this, of course, is that KSNET is quite unlike the other major VAN companies in South Korea, because we focus on the SME market more than the large retail markets. We are quite dependent on the use of agents, who are responsible for the servicing of the various SME merchants, the terminals, et cetera, maintenance and so on. And so there is also a lag in terms of pushing some of the reduction that we get in fees from the issuers down to the agents. It's a bit unclear to us exactly as to when those negotiations will all be completed, but I do expect there to be a lag in terms of the top line growth from [plating] into EBITDA or profit after tax growth numbers as well. That period, at this point in time, I estimate at probably around six months. But for now, our main focus is just to make sure that we maintain market share and that we maintain the volumes that we've been accustomed to.
Okay. Thank you. And just quickly on India, with MobiKwik, could use just a bit more information on how you anticipate this to develop there. There has been delays and a few hiccups, as you mentioned, so just some more clarity on how you view the next 12 to 24 months progressing for MobiKwik.
Sure. I will let Dhruv come in here. Dhruv as well is our head for India. But Dhruv is obviously quite closely involved on the relationship with MobiKwik and what we plan to do with them. There are always, just from my perspective, there are multiple issues in India that one has to contend with. The government is really very active in the payments space. We have a lot of new regluation coming in from time to time, so having to do, as an example, with certain new requirements around KYC for digital wallets, which is something that wasn't there before.
So there's that to contend with. There's also a common interoperable wallet testing that's been developed by government which we have to contend with. But overall, I think the launch, finally, of VCC with MobiKwik is a big milestone for us. Obviously, it's only been going now for about two weeks on both the iOS and Android platforms, but already the growth in volume and the uptake rate has been quite encouraging. But Dhruv, maybe you could just give us your views going forward over the next year or so, where you can see this going.
Sure. So, obviously, we've now got the project live, and the anticipation is that we will continue to increase the penetration within the MobiKwik client base. So you're looking at a runway of potentially millions of customers over time. The revenue model on VCC for the specific deployment is a combination of license fees and transaction fees. So we will continue to work with MobiKwik as we continue to do that. But as we look at MobiKwik and India more broadly, we've got potential products and projects that we're looking at with MobiKwik specifically, that we are contractually in agreement with them to kind of roll out over the next 12 months. And outside of that, we would figure out some opportunities that we're evaluating particularly more so on the UEPS side, which wasn't formally part of the India strategy. So it's taken us a while to get this first project going, with a lot of the work being done toward some of the other ones. We hope to get them up and running and ramped up a lot sooner than it took us to get VCC going.
Okay. Thank you.
[Operator Instructions] The next question comes from Will Settle of Woodmont.
Yes, just wanted to follow up to the KSNET questions earlier. So, in your Investor Day, you highlighted KSNET, and I guess the fiscal '17 EBITDA level of $42 million-or-so. I mean, is returning to that a potentiality or we just in a new environment with the regulations, and what the kind of future level is remains to be seen, you seem pretty hesitant to kind of pinpoint that whereas as back in December you're highlighting that as a number and attaching a value to it?
Yes. We certainly wanted return to that level of profitability. I think, it will take us probably most of fiscal 2019, on a monthly run-rate basis to get back to that number. But for us, it is an absolute priority to ensure that what we've lost by way of profitability, we can regain through a combination of 3 things, right? The first is, as I've indicated, increasing on the volume side. That we can see happening as the smaller VAN companies are being squeezed out of the market due to these developments. The second, of course, is the increased marketing and uptake of our direct EFT and Payment Gateway products. It is a highly competitive market as well in the Korean space. So as you can imagine, most of the Korean retailers have an online marketplace. Most of them make use of Payment Gateway services, and a lot of those payment Gateway services are actually offered at cost or below cost by some of our competitors. So that's something that we always need to be aware of and alive to. And the third thing is, through the introduction of new products and services, I think the most notable product which we've introduced over the last year or so, is a very targeted, very focused working capital finance facility. So -- and again, because we deal primarily with the SME market in South Korea, we've got 250,000 small retailers, most of them are quite keen to have access to 30 or a 60 or a 90-day facility to expand their businesses, to buy more stock. This is an area where we believe we can add in a tremendous amount of value and is obviously also a lot more profitable than just the pure processing side of the business. So through a combination of those 3 things, we hope to bring our EBITDA levels back to the sort of $40 million, $42 million level within the next 12 months.
This is Dhruv. Just to close out on than point. So we used to be at mid- to-high 20% EBITDA margin on KSNET. So on an absolute basis, I think we can get back as Herman has pointed out the reasons to where we were. But the new normal, probably with the pricing cut is probably a low- to mid-20% EBITDA margin.
Great. Thank you very much gentlemen. That was the final question. On behalf of Net 1 that concludes this afternoon's conference. Thank you for joining us. You may now disconnect your lines.
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