Lesaka Technologies Inc (LSAK) 2007 Q2 法說會逐字稿

Good afternoon and welcome to the Net1 Second Quarter Earnings Results for Fiscal 2007. [OPERATOR INSTRUCTIONS] I would now like to turn the conference over to Dr. Serge Belamant. Please go ahead, sir.

Thank you very much. Good morning to our investors in the U.S. and good afternoon to our investors in Europe and South Africa. Thank you very much for joining us for our second quarter of fiscal 2007. With me today is Herman Kotze, CFO. Both of our press releases and our 10-Q are available on our websites at www.Net1UEPS.com.

First of all, let me apologize for my voice. It's not lack of enthusiasm; I've got a terrible flu at the moment but I felt that I wanted to be the person relating the results of our second quarter directly with you.

Before we begin we must remind you that we will be making statements about the Company's future results during this call. These statements constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Any forward-looking statements represent only the Company's views as of today, February 8, 2007, and are based on current expectations in light of the current economic environment. While we may choose to update forward-looking statements in the future, we specifically disclaim any duty to do so. Therefore, these forward-looking statements should not be relied upon as representing the Company's views as of any later date.

Forward-looking statements and projections are inherently subject to significant economic, competitive and other uncertainties and contingencies which are beyond the control of Net1. Excuse me. We caution you that such statements are not guarantees of future performance. Actual results may differ materially from those expressed or implied in the forward-looking statements. Important assumptions and other important factors could cause actual results to differ materially from those in the forward-looking statements and projections as specified in our quarterly report on Form 10-Q for the three and six months ended December 31, 2006 that we filed on February 7, 2007.

In addition, during this call we will be using certain non-GAAP financial measures that are filed under the SEC rules. We're required by its rules -- we have provided a reconciliation of the non-GAAP measures to the most directly comparable GAAP measures as exhibits in the press release dated yesterday.

This being said, I would like to spend most of my time on the call today on providing feedback regarding the progress we have made on the roadmap that are outlined during the strategic conference call on December 15th of 2006 with specific reference to our recent announcements relating to the banking license and our SmartSwitch Nigerian initiative after which Herman will provide additional details on our financials; we'll then conclude, as usual, with a Q&A session.

In terms of our second quarter of fiscal 2007 the Company is indeed satisfied with the group's performance specifically in light of the fact that our second quarter is traditionally the worst affected by the seasonability of our payment cycles in social welfare grant payment business. In analyzing our results we decided it would be meaningful and useful to our investors to provide certain non-GAAP measurements, namely fundamental net income and fundamental earnings per share, that eliminate amongst other adjustment the significant non-cash accounting increase required by GAAP relating to the present acquisition. This fundamental earning numbers eliminate the amortization charges for intangible assets, net of taxation benefits as well as a stock compensation charge that we incurred as a result of the Prism acquisition and options granted to our employees as well as the expenses related to a potential acquisition that we ultimately decided not to pursue at this point in time.

On this basis and in dollar terms, we recorded an increase in fundamental net income of 10% for the three months ended December 31, 2006 when compared to the three months ended December 31, 2005, an increase in fundamental earning per shares of 10% to US$ 0.27 for the three months ended December 31, 2006 when compared to US$ 0.25 for the three months ended December 31, 2005.

Since the Company's reporting currency is the U.S. dollar but its functional currency is the South African rand and due to the significant impact of currency fluctuation between the U.S. dollar and the South African rand on the Company's results of operations, we also analyze our results of operations in South African rand to assist investors in understanding the changes in the underlying trends of our business.

During the three and six months ended 31, December 2006, South African rand was significantly weaker against the U.S. dollar than during the same periods of the prior year. As a result, our rand-based performance shows an increase in fundamental net income of 23% for the three months ended December 31, 2006 when we [inaudible] the net to December 31, 2005. And fundamental earnings per share increased 22% to 1 rand 98 for the three months ended December 31, 2006 compared to 1 rand 62 for the same period the previous year, December 31, 2005.

I would like to spend the remainder of my time, as Herman will discuss the financials in greater detail, the implication of the cooperation agreement that we have now finalized with Grindrod Bank in South Africa as well as our initiative in Nigeria. I will finally touch on some new business developments that we are currently doing in other countries in the world including Indonesia, Vietnam, Iraq, the Philippines and one other -- one of two other African countries.

Our loyal shareholders, which we have many, are all acutely aware of the status we have been struggling for many years now to obtain access to a banking license specifically in South Africa that would allow us to launch our wage payment initiatives in South Africa itself. We have pursued several avenues and in all fairness been disappointed many times with the outcome as we did not believe that any of those initiatives brought the correct financial deal that we were looking for.

It was and it is, therefore, with great pleasure that we have recently announced that we have entered into a corporation agreement with Grindrod Bank that will enable us to achieve a wage payment operation in South Africa under terms and conditions that we believe will be extremely beneficial to the Company.

In terms of this agreement Grindrod Bank will establish a retail banking division, an area of business it is not involved in currently, that will focus on building a customer base that will utilize exclusively our UEPS voice payment application and its related functions. Grindrod will be responsible for the HR administration compliance, risk management and financial affairs of the division while Net1 will be responsible for the supply, maintenance, operations of all the UEPS hardware and software required to operate and run our wage payment systems successfully.

We will also together market the WPS system to any unions, employers and employee group that we believe are absolutely the right target for our system in South Africa, namely the under-banked and un-banked people of our country. In return we will receive a monthly fee per card of around 3 rand per card issued and we will also receive ongoing revenues based on the amount of business transacted by this retailer division net of this direct cost. The percentages that we'll be receiving will never be less than a 50/50 relationship.

Grindrod and Net1 will initially contribute 5 million rand or approximately $700,000 to assist with the set-up of the division and the activities of this division will be overseen by an executive committee that will consist of two Net1 and two Grindrod representatives. We are currently busy with the establishment of this division and during this stage, the third quarter, Grindrod and Net1 will install and/or integrate the necessary technology co-platform, link the system to the South African national payment system and start up the division. We anticipate that this process will be completed during the fourth quarter at which time we will commence with the processing of our wage payment system application. The marketing, of course, of our wage payment system and its products will be running in parallel with the setting up of the division itself. The division and marketing efforts will obviously focus initially on large employers and credit unions and ultimately tap into the estimated 5 million un-banked or under-banked wage earners in South Africa. Excuse me.

We believe that the value proposition to both employers and employees is more than compelling. We also employ the payment system that will eliminate all the risks inherent to cash payments; most notably security risk, loss of productivity during the cash pay-out process at a price that is far cheaper or lower than the traditional cash payment methods. We also employ a bank account that removes the personal risk of carrying cash and gives them access to financial services that they never had access to before such as the ability to buy goods or services cashless, access to affordable credit, third party payments, debit order facilities, money transfers and the ability to save any amount and earn a proper interest rate on savings.

Other products such as insurance, medical insurance, burial insurance are also going to be offered in part and parcel of our product offering to entice as many clients as possible over the focused amount of time.

We are often asked how many wage payment cards we think we can deploy over the next several years. Time will obviously tell us what the answer is. We are, however, reasonably comfortable that we should reach 1 million wage payment card holders over the next three years in a conservative manner simply because we have [inaudible] over the last year or two already entered into negotiation with many organizations that are waiting or have been waiting for us to solve the issue relating to taking deposits. We feel very comfortable that these numbers can be met as long as our product offering is more than competitive than what is available today which is incredibly limited from formal banking systems.

Implementation of our wage payment initiative will be greatly assisted by the terminal base we have now deployed and the terminal base service as a result of our present acquisition as a [inaudible] of the system is beyond reproach. I must note at this stage that our UEPS technology that has the ability to morph in the transaction will also allow full interoperability with first world technology such as offers by Visa and MasterCard and Mexican banks. Obviously, these products will be offered under the same terms and condition in existing banking systems where our customers will derive benefits when they are using our infrastructures and our technology rather than that of other competitors. We believe that in the short-term to medium-term the next differential of pricing and product offering will attract most of those particular customers to our solutions rather than the solution that are deemed to be called first world countries but offer very little if nothing at all to the under-banked and poorer people of any country.

I would like to focus a little bit now on our activities in Nigeria. Due to the extent of current opportunities that are available to us in Nigeria and the multitude of interested parties in SmartSwitch Nigeria, excuse me, we decided to place a moratorium on the issuing of shares in this business to other shareholders other than those who had already subscribed and paid for their shares. This has left us with 80% interest in SmartSwitch Nigeria. The position that made our [inaudible] future is we gain more clarity on who the appropriate, critical, strategic partners are depending on the applications that we launched in Africa's most populace country.

Very topical at the moment is the national tender issued by the Nigerian government for the provision of a smart card based identification system and critic ranking system to -- in excess of 65 million Nigerians which has to include an [inaudible] 20 [inaudible] application. Our UEPS solution has been included in the tender response of two out of the three bidders that they are being short listed for the final evaluation process which is scheduled to take place during the next month. We feel very comfortable that the solution we have offered the Nigerian government is very unique and unlikely to be able to be met by any other technology provider that does not have access to our UEPS system.

Our UEPS solution is also being included in the tender response. As I've mentioned before, and we wait with bated breath as to the outcome of this particular offering, it is obvious that the outcome of this tender will have a significant impact on the business and shareholding of SmartSwitch in Nigeria. In the meantime, however, we continue to pursue other business opportunities and to conduct business development in Nigeria such as the establishment of a central processing platform. For in excess of 300 glass community banks in Nigeria each of which, excuse me, services makes this a 15,000 customers. We have also prepaid and submitted different business tenders and business solutions to a number of other organizations in Nigeria with our partners such as Diamond Bank and we believe very strongly, once again, that this initiative are moving and picking up a usual amount of momentum. The timing, of course, on the portability of the switch is obviously dependent on the application launch and the success of our partners in the identity card tender.

The other milestones on our Net1 roadmap have also been achieved in line with our expectations. First, our performance in December, we have now signed contracts to implement our virtual [inaudible] or [VTU] solution in both Colombia and Vietnam. We hope that this VTU implementation will be stepping stones to full scale UEPS implementation in these countries. Herman and I will be visiting Colombia towards the end of the month in order to discuss exactly that particular link probing by using the UEPS technology as a Colombian payment system solution.

The VTU application gives you an excellent example of success we've had in integrating the Prism business into Net1. We are using VTU to enter new markets while [inaudible] based and to use those particular platforms to actually launch UEPS solutions.

Another very good example of our success is the filing of our latest patents that incorporate a UEPS solution as well as the Prism smart card expertise into a system that will seamlessly reach mobile phones to existing payment infrastructures such as ATM's, point of sale devices, the Internet and voice channels. We believe this is an incredibly exciting opportunity for us to enter first world markets with UEPS [inaudible] all payments through the Internet or voice channels without any changes to be made to those particular systems whatsoever.

During the presentation that I will be making in San Francisco between the 5th and the 8th of March of this year, the Morgan Stanley Technology Conference, I will be spending my entire time explaining how the UEPS technology on cell phones will be able to be utilized to bridge the gap between first world and third world payment systems. We believe the third world solution is ours already; it's a question of deploying it. But we feel very strongly that there is no need for us to replace the first world infrastructure if we can actually interoperate with it seemingly but of course add the security that it presently lacks. We believe our new patent and systems achieve those goals.

Finally, no presentations can be complete without mentioning our core business of social welfare grant payments in South Africa. We have now formally received notifications that our contracts in five provinces where we render a payment service have been extended until March 31, 2008. This is good news for the Company.

SASSA will probably commence its new national tender process during the next few months and we will keep you updated on any developments in this particular area. Please note that our relationship with Grindrod Bank gives us another potential service that we can link to existing solution and make our national offer to satisfy even stronger than what it is today.

In the meantime, I'm also extremely pleased to announce the SASSA will transfer approximately 320,000 new beneficiaries in the northwest province to us. These beneficiaries are currently being paid by the South Africa Post Office utilizing -- and these new payments will obviously utilize our full UEPS solution including and utilizing our merchant acquiring infrastructure in that region. This beneficiary will be transferred to us over the next three months and we should be paying all of them at worst by the end of our fiscal year. Hopefully it will be a little bit earlier than that. The addition of these beneficiaries represent almost 10% of our current base. We'll double the number of UEPS account holders we currently have in the northwest and will entrench us in that particular province. It will also add a significant momentum on our merchant acquiring initiative in that province itself.

You probably have noted in our press releases that we also grew our merchant acquiring business in excess of 20% from December 2006 compared to November of 2006 a 20% jump where we finally cracked the 1 million mark in terms of beneficiary and grant payments; in fact it was 1.150 and in excess of 518 million rand were paid during that particular month which is another record month for our company. We continue to feel extremely excited that with northwest that number of beneficiaries should actually continue to grow and it is still growing in the other provinces themselves. It's quite obvious from those numbers that our customers absolutely love the payment system that we've introduced for them and the retail involvement in terms of safety and in terms of the top of service that they can actually expect in order to facilitate and to ease their plight and increase or improve the quality of their life.

Perhaps to finish off, I would also like to mention that we have tendered for a new national payment system for Ghana. I believe that there are only six tenderers, that they have been short-listed at this stage and we are expecting that number to be cut down to two or three in the next few days. We have no doubt in our minds that we will be part of that particular short-list as what is required by the Ghanian government is something that we believe we can offer as it includes smart card or off-line payments, [inaudible] interoperability as well as interoperability with existing EMV and next to our systems. We still very, very strongly believe that we are the only company in the world today that is positioned to provide these type of solutions and has the track record to actually do this type of business.

To finish off, we would also like to say that we are making significant progress in countries such as Indonesia, the Philippines, Vietnam related to both UEPS as well as to telephone solutions and that we are closer to arriving at the conclusion in that Iraq initiative where we have had plenty public exposure over the last couple of weeks in excess of $12 billion was lost by the U.S. Government due to the fact that payments would be made in cash. We, of course, can eliminate this particular problem.

Let me conclude with I believe that we are very well positioned to deliver the earnings that we previously disclosed and that our business is probably stronger now than it was ever before and that we are very well positioned on the roadmap we have defined.

I'd like to thank you all for your attention. I apologize, once again, for my voice and I'd like to hand over to my CFO, Herman Kotze. Thank you very much for your time. Herman, I'll let you use this.

Thank you Serge. Good morning and good afternoon to our listeners around the world. I will be doing the more mundane job - the boring job of reviewing our second quarter financial operating performance before returning to the results of our business segments.

As Serge mentioned earlier, the second quarter of fiscal 2007 incorporates the results of Prism, just to remind you. In addition, as discussed further in our finding on Form 10-Q for our second quarter effective from the first of October 2006 we acquired the remaining 25.1% of EasyPay which is a subsidiary of Prism. Accordingly, our second quarter of fiscal 2007 results include 100% of EasyPay effective from October the 1st, 2006.

In order to provide you with relevant information recording the financial impact of this acquisition, we have provided you with [inaudible] and long GAAP measures in our press release including the Net1 financial results on a stand alone basis excluding Prism which is in Attachment B of the press release and we've introduced a measurement of fundamental net income and fundamental earnings per share to demonstrate the impact of the Prism purchase accounting and stock compensation charges on the group results.

Revenue for the second quarter came in at $49.6 million which is up 5% year-over-year. As you may be aware there has been significant currency fluctuations between the South African rand and the U.S. dollar over the last year. So let's focus on our functional currency results for now.

For the second quarter, our average rand/dollar exchange rate was 7 rand 52 to the dollar compared with 6 rand 58 for the second quarter of fiscal 2006 and 7 rand 21 for the first quarter of fiscal 2007. On a rand basis our revenue has, therefore, increased by 16% compared to the second quarter last year. Our gross margins for the year were strong coming in at 78% for the second quarter of fiscal 2007 compared to 73% last year. If I could just denote that the gross margin last year was adversely affected by the sale of terminals to Nedbank. As we previously indicated, these sporadic terminal sales will done at a much lower margin than our other activities.

Operating income for the second quarter of fiscal 2007 was $24.1 million which is a decrease in dollar terms of 5% year-over-year. On a rand basis, however, operating income increased by 6% year-over-year. Our overall second quarter operating margins of 41% was lower than net of 45% for the second quarter of fiscal 2006. And this is because the inclusion of Prism operations during the second quarter of fiscal 2007 has reduced our overall operating margin as Prism's operation generates a far lower operating margin than our own Net1 historical operations.

In addition, our margin during the quarter was further reduced by intangible amortization charges related to the Prism and EasyPay intangible assets acquired. This reduction was partially offset by the continued adoption of our merchant acquiring initiative, increased volumes of transaction at EasyPay and increased volumes and pricing in our pension and welfare business.

Our second quarter net income was $12.8 million which is a decrease in dollar terms of 8% year-over-year. On a rand basis however, net income increased by 2% year-over-year; GAAP earnings per share decreased by 9% from 24.6 U.S. cents in the second quarter of 2006 to 22½ cents in quarter 2 of 2007. In constant currency terms, which is rand terms, GAAP earnings per share increased by 2% compared with Q2 of 2006. Fundamental earnings per share for Q1 2007 was 27 cents compared to 24.6 cents for Q2 of 2006 which represents an increase of 10%. On a constant currency basis, fundamental earnings per share for Q2 2007 increased by 22% compared to Q2 of 2006.

Our effective tax rate for the three months ended December 31, 2006, is 40.7% compared to 38.1% for the three months ending December 31, 2005. The change in our effective tax rate was primarily due to additional nondeductible expenses including expenses relating to a potential acquisition that we decided not to pursue during the three months ended December 31, 2006, when compared to the three months the end of December 31, 2005.

If we now turn our attention to the performance of our business segments, the operations of Prism have been allocated to two of our existing reportable segments, namely transaction based activities and hardware/software related technology cells. Our transaction based activity segment had revenues of $50 million for the second quarter, which is an increase of 10% year-over-year on a dollar basis. On a rand basis this represented an increase of 22%. These increases in revenue and operating income were due primarily to the continued adoption of our merchant acquiring system. In the provinces where we've distributed welfare grants increased transacting ability at participating retailers' point of sale devices in these provinces, higher volumes from all of our provincial contracts and the inclusion of transaction fees generated by EasyPay which is now a wholly owned subsidiary of Prism and Net1.

The focal number of payments posted to beneficiaries, social welfare grant beneficiaries, increased from 10.4 million for the second quarter of fiscal 2005 to 11.3 million during the second quarter of fiscal 2006 which is an increase of 9%. Sequentially, the total number of payments processed to beneficiaries increased by 1% from 11.2 million for the first quarter of fiscal 2007. The largest increases were in the KwaZulu-Natal and Limpopo provinces. I need to remind you that we experienced these [inaudible] in our transaction based activities operating segments. This is because our beneficiaries are able to load their grants onto the cards as soon as the grant payments file is activated which typically happens during the week which precedes the commencement of the calendar month. We recognize the fee revenue related to the distribution of welfare grants when the beneficiaries load the grants to the cards. Now there's one exception to this rule, generally, which is for the January payment cycle when the activation of the payment file is done on a limited basis at merchant locations only. In other words, we do not activate the pay file at our fixed pay points.

As a result, the revenue recognized in the second quarter of our fiscal year are generally lower than the other three quarters due to the limited number of grants distributed during the last week of December. The activation of the payments file for any month, and that goes for any of the quarters, generally also depends on whether the first calendar day of the month is a weekday, a Saturday, a Sunday or a public holiday.

During the second quarter of fiscal 2007 we had processed a total of $185.2 million in transactions by dollar volume through our merchant acquiring networks compared to just $180.4 million during the second quarter of fiscal 2006 and $202.3 million during the first quarter of fiscal 2007, all on a calendar month basis. The productivity of our [inaudible] terminal base of 4,145 terminals continues to improve with an average of 683 transactions processed per terminal during the completed pay cycles of the second quarter of fiscal 2007 compared to only 470 during the second quarter of fiscal 2006 and 678 during the first quarter of fiscal 2007. The movement from the comparable period in fiscal 2006 demonstrates the rapid acceptance rate of our call-out list as they become familiar with and accustomed to the convenience associated with our merchant acquiring initiative as they can receive and spend the grant at any time of the month.

I am pleased to report, as Serge indicated before, that we have seen record transaction activity through our merchant acquiring system during January 2007 and certainly during the first week of pay outs for February 2007.

During the three month ended December 31, 2006, EasyPay processed 170.6 million transactions with an approximate value of $3.7 billion compared with 101 million transactions processed with an approximate value of $3.2 billion during the three months ended December 31, 2006. The increase in spending activity from the first quarter to the second quarter of fiscal 2007 was due to the festive season and summer holidays in South Africa. We expect the spending activity to decrease to levels similar to the first quarter of 2007 during the third quarter of fiscal 2007.

The average fee per transaction during the three months ended December 31, 2006 and September 30, 2006 was $0.03 U.S. cents per transaction. The fees related to the three months ended December 31, 2005 are not included in our results for the three months ended December 31, 2005 as we acquired EasyPay as a result of the Prism acquisition on July the 1st of 2006. We don't expect a significant fluctuation in rand terms in the average fee per transaction during the third quarter of fiscal 2007.

On a dollar basis the smart card account segment had revenues of $8.5 million for the second quarter which is a decrease of 3% year-over-year on a dollar basis. On a rand basis, however, this represents an increase of 8%. The total number of active smart card accounts increased by 9% from 3.5 million during the second quarter of fiscal 2006 to 3.8 million during Q2 of fiscal 2007. Sequentially, the number of active smart card accounts increased by 1.4% from Q1 of 2007 to Q2 of 2007.

Our financial services business had revenues of $2.8 million for the three months ended December 31, 2006 which is a decrease of 30% compared to the second quarter of fiscal 2006. On a rand basis, this decrease is 22% year-over-year. Our traditional lending business continues to remain static as part of our strategic decision not to grow this segment.

Revenues and operating income from UEPS based lending decreased over the second quarter of fiscal 2007 compared with the second quarter of fiscal 2006 due to lower interest rates charged to customers and a decrease in our lending book as our customers escaped from the debts borrowed.

The final operating segment is our hardware/software related technology cells. This segment traditionally includes revenues that occur on an irregular or once basis and it can be difficult to predict cells from year-to-year. The segment [eclipse] of cells of UEPS related hardware and software as well as the Prism cells of subscribers that got into the modules of SIM cards, cryptography services and SIM card licenses. This segment had revenues of $8.3 million for the second quarter of fiscal 2007 which is an increase of 12% year-over-year on a dollar basis. On a rand basis, revenues in the segment increased 34% year-over-year mainly as a result of the inclusion of Prism's activities during the year. Overall the operating margin of this segment declined from 52% for Q1 of 2006 and 11% in Q1 of 2007 to 7% for Q2 of fiscal 2007. In order to understand the main drivers behind this significant decline in margins, we need to separate the traditional Net1 business from the Prism contribution to this segment. The traditional Net1 business on a stand alone basis recorded operating margins of 54% during Q2 2007. Our second quarter of fiscal 2006 include longer [inaudible] cells of about $3.4 million to Nedbank which contributed to the higher margin in the prior period. Sorry.

The Prism result on a stand alone basis resulted in a negative margin of 6% during the three months ended December 31, 2006. This loss is mainly the result of the allocation and the amortization of Prism's intangible assets to this specific statement. Excluding the effect of this amortization charge, the overall operating margins for this segment improved from 7% to 18% for Q2 2007. Prism's operating margins in this segment is also negatively impacted by some manufacturing activities. Sales prices for SIM cards declined by more than 20% during the three months ended September 30, 2006 due to price competition from manufacturing located in countries with lower production costs, global oversupply and global surplus manufacturing compared with [inaudible]. We expect this stream to continue into the foreseeable future. For clarification I would like to reiterate, as well, that the software and hardware cells to SmartSwitch Nigeria of approximately $11.3 million during this quarter have been completely eliminated from this segment as a result of the consolidation of the Nigerian business with ours.

Turning to our balance sheet, as of December 31, 2006, we had $127.9 million of cash and cash equivalents. I remain comfortable that we have sufficient liquidity between our post acquisition cash and cash equivalents and our current credit facilities to fund our working capital requirements for the next four quarters.

It is worth mentioning that our pre-funded social welfare grants receivable balance is higher as of December 31, 2006 compared with June 30, 2006. This is due to more beneficiaries electing to receive the grant at merchant locations as opposed to at traditional pay sites as well as due to an increase in the number of welfare grants distributed. Our goodwill and intangible asset balances have increased compared with June 5, 2006 as a result of the acquisition of Prism and the remaining 25.1% of EasyPay during the six months ended December 31, 2006. The increase in our other payables is due to the reimbursement due to merchants for distributing grants to our beneficiaries related to the January pay cycle which commenced in the last week of December of 2006.

With that, thank you for your time, and we'll be happy to take your questions now. So Operator, if you could please proceed with Q&A now.

Thank you very much. [OPERATOR INSTRUCTIONS] Our first question comes from Dave Kloning of Robert W. Baird. Please go ahead, sir.

Thank you. My first question - you mentioned with South African wage payments, I just want to make sure I understood it right. Within a few years you expect to have about a million cards. And did you say the monthly fee per card was 3 rand? Is that correct?

I think we're going to be careful that this is not misunderstood. The fee of 3 rand that we're talking about is the fee that we are charging, for lack of a better word, a high association between ourselves and Grindrod to operate the bank account on that technology. So the 3 rand that comes to us simply because we actually processing, for lack of a better word, and then falls straight into our card processing segment which exist today.

Any other income or profit that will be generated out of that association we should obviously -- the provision of a banking account that could be provided at the cost of 20 or 25 rand per month, any other financial services that will be provided as part of the banking account in terms of [inaudible] profitability, that will be shared on a worst case scenario 50/50 between ourselves and Grindrod. So 3 rand is not what we expect to make per card offer going forward. Three rand is a minimum fee that will be paid to us to actually manage or to operate a bank account on behalf of customers. The cherry, of course, will be on the top in terms of what will be the pricing that together with Grindrod we go out to our customer base in order to see how much profit we will be making between the two of us.

Okay. That is great, better clarification. So it sounds like you expect the revenue per card that needs to be shared to be somewhere more in the 20 to 25 rand per month once you layer on all the activities, etc.; that's the amount that has to be shared?

Absolutely. In other words, we're saying that 3 rand is by the by; that's a processing cost and, as we mentioned before, we are still very much looking at the $3 to -- it could go any time -- anything between $3 and $6 per month, per card depending on the package of goods and financial services that each one of our customers would actually go for.

Great. And then just one follow-up. In terms of the SASSA agreement, did you mention I think last quarter that there'd be a potential at some point to have to fund some of the grants? Any updates there in terms of that?

I think in terms of that it will be given as soon as we see or we have sight of the tender that is going to come out and we're not 100% sure at this point in time if government will decide to let treasury - which might make sense from a financial point of view - actually do the pre-funding of the grants which in theory they should be able to do cheaper than us; or if, in fact, they will ask people like ourselves to do the pre-funding ourselves. If that is the case, then obviously depending how many provinces we are likely to get because obviously we intend to grow the number of provinces and not decrease it, our amount of money that we will require for pre-funding might go up proportionally to the number of people that we might add extra.

Great. Thank you.

Thank you.

Our next question comes from Craig Peckham of Jefferies. Please go ahead.

Good morning, Serge and good morning, Herman. I wanted to ask a little bit about EasyPay. Could you give us a little bit more background of what was behind the move to buy out the rest of EasyPay; and then the second part of my question, could you give us some sense for how EasyPay has grown in the year-over-year comparative quarter. We don't have, obviously, last year's December quarter because it wasn't owned by Net1 at the time. But I wanted to get a sense of how transactions are growing on that basis.

Sure. No problem, Craig. We acquired the 25% of EasyPay because simply to have a minority shareholder in an operation which the top of EasyPay isn't always the easiest relationship to manage specifically if you need to make rapid changes to the system or if you need to expand it and you require additional funding. So we've been looking at the acquisition of the 25% of EasyPay that we didn't have every since we completed the Prism acquisition. I must state that the previous shareholder of EasyPay, who was an black economic empowerment partner of EasyPay at the time, and us parted on exceptionally good terms. I think that we've done a great deal for BEE specifically in South Africa and hopefully we'll get the credit for that going forward.

But in terms of operating the business and maybe running it more as an integral division of Net1, rather than a [inaudible] and stand alone company which is what it's had to be [inaudible] shareholder makes it a lot easier for us to make rapid decisions and to implement the Net1 technology specifically as it relates to the conversion of the point of sale devices linked to EasyPay. That makes it a lot simpler for us to come into those activities and it makes it a lot simpler for us to capitalize the business to the extent required without having to ask the other shareholders for permission or to go through all the regulations surrounding that. So from our point of view, it makes our life a lot easier.

In terms of the transaction volumes, obviously the information that we have is also fairly new. Obviously, we've got some data that stretches back over a couple of years that we got during the due diligence process. But in general I think the transaction volumes year-over-year have increased in line with the general growth in spending in the South African economy and I would estimate that it's probably up by about 10% on a year-to-year basis on a transactional volume basis. I think in value terms it's probably up a bit more than that - probably around 30 to 20% simply because of the good times experienced by all over here as well as the extension of more credit to South African's in general.

Okay. And Herman I wanted to follow up with just a bit of a clarification on your outlook for the entirety of 2007. I understand there hasn't been any change in the guidance but could you clarify for us, again, what the company is looking for in terms of 2007 expectations?

Sure. Our initial guidance which we gave at the beginning of the year, we stated that we believed that Net1 could grow its earnings - and we've only focused on earnings per share numbers not on revenue or any other measurements -- we said that we believe we could grow Net1 by 20 to 25% and Easy -- not EasyPay - Prism, sorry, on a 25 to 50% basis. That still stands regardless of the fact that we have obviously - and I think the confusion has come in as a result of the Nigerian press release.

You will recall at the time in early June when we actually announced the establishment of SmartSwitch in Nigeria, at the time we indicated that we would add 51% of the switch which implied that we would be consolidating that business but I think that there was a general view that the activities in Nigeria would be equity accounted for and that obviously implies that the profits from the sale of hardware/software to that business which we had indicated to be around $14 million would be the revenue and the profit obviously would be a fairly high proportion of that considering that our cost on that is very low.

I think there was a general view that we would also liquidate accounts for that business as we've done with SmartSwitch Namibia and SmartSwitch Botswana. Our earnings forecast excludes the profit on the sale of those hardware and software items; so to make it absolutely clear, we believe that we can still grow on a constant currency basis, of course, because we don't know where the rand is going but on a constant currency basis the Net1 results of 20 to 25% remain achievable despite the fact that those hardware and software sales are going to be eliminated. And similarly on the Prism side we still think that we can achieve those growth numbers predicted.

So I hope that makes it clear. If you require any further clarification, please ask me.

Just to clarify once more, on the Prism growth outlook that is before any impact of intangible amortization. Right?

Correct. Yes.

Okay. Thank you very much.

Ladies and gentlemen due to time constraints, our final question will come from Dhruv Chopra of Morgan Stanley. Please go ahead, sir.

Good afternoon, gentleman. To the extent possible can you try and quantify the impact of the seasonality of the welfare payments in December and is that usually made up in the March quarter?

It is. This year we actually tried to soften the blow as it were by opening the pay files as we normally do during the week preceding the beginning of the next calendar month. But obviously due to logistical issues around that time of the year we decided to only open it at selected merchant locations. So the impact is slightly softer than what it would have been in the prior year. And it's difficult to say exactly in pure rand terms what it would have meant in terms of loss of revenue. But I would estimate that if it had been a normal month and we had opened the pay files at the normal time and there would have been normal activity for at least three or four days, at the end of December we would probably have been able to invoice out another 20 to 50 million rand which we would have recorded as revenue and obviously you can look up from the operating margins what the profit would have been on that. That number generally, obviously, made up during the January pay cycle.

Just a word of caution again, and I know this is very confusing - but we could have a recurrence of the seasonality problem during other quarters. It shouldn't happen a lot but the whole thing is really dependent on whether the first day of the calendar month is a weekday, a Saturday, a Sunday or a public holiday because it sometimes happens and I think this year over Easter there may be a slightly -- a recurrence to actually extend the issue. Just to give you an example, if the first day of the month is on a Sunday and the Monday happens to be a public holiday it's very difficult for us to open the pay file in the week preceding those dates so we would have to carry forward the opening of the pay file into the new calendar month. So the other are anomalies but in general over a 12 month period we should be recording 12 full and completed revenue cycles. It's just that sometimes between the quarters there is a slight anomaly in terms of when the revenue may be recognized.

Thanks. That's very helpful. Just quickly, on the contracts in Colombia and Vietnam, can you talk about the ownership structures there and then I know Serge provided in December some financials around the Colombia contract. Would Vietnam be similar to that?

Yes, Dhruv. At the moment, the Colombia contract is on a 50/50 partnership. The Vietnam contract VTU based we will not have more than 35% initially but when we activate or we incorporate into this, the UEPS activities or the new activity vis-à-vis cell phones, the inclination is to get us back to the 50% mark.

And the economics, a similar size to Colombia?

The economics in Vietnam are probably slightly larger than in Colombia. The percentage that we are getting on delivery transaction is about the same so, yes, it's comparable to the Colombia market. It's going to depend entirely on the market penetration of the cellular phone company with VTU from one country to the other so we will keep you posted with the nice little graph in terms of showing where we are in terms of number of subscribers that are utilizing VTU for pre-paid in each different country; but otherwise the economics of each transaction will be similar.

Got it. Thank you. And then just final questions, quickly. Have you had any additional discussions or has there been any progress on prudential discussions with AllPay to consolidate the technology?

We continue to have discussions through our black empowerment partners and, as you know, AllPay used to be owned by [inaudible] which is now owned by [Barclay's] And the largest economic black empowerment economic group in [inaudible] today is operated or is led by [Tokio Sequali] and our black empowerment partners are in direct communication with him in order to see or to finalize what I believe has been accepted in principal. But here you are dealing with AllPay, you're dealing with Barclay's, you're dealing with [inaudible] and you're dealing with the BEE group which means those type of negotiation tend to take maybe a little longer than what they should. So we still believe that so far nobody has come around to actually say that they are not interested and that they don't want to do it so we still believe that it is something fundamentally that is going to happen in time.

Great. Thank you very much, guys. And feel better, Serge.

Thank you very much, Dhruv.

Ladies and gentlemen, we have reached the end of our time. Dr. Belamant, would you like to make some closing comments?

I'm recovering. I'm just in a bit of a cough spell. Once again, to everybody on the call I hope that the information we've given you is clear enough for you to be able to get a better feel or better understanding of where we are today in our roadmap. I believe we will continue to provide you with further information in terms of where we are in a particular roadmap because it's probably the only way that you can actually track how successful the Company is and how successful the Company can be.

We are certainly extremely excited about where we are. We are very pleased about our initiative with SASSA; we're very pleased about the confidence in us by giving us an extra 320,000 welfare beneficiaries which of course will have a significant impact over the next 15 months to our top line as well as our bottom line. More importantly, I think it's a great vote of confidence which we obviously believe we will be able to carry forward whenever the national tender is finally issued.

We, of course, are even more excited about bidding down our banking association which we obviously required in order to really launch that UEPS system which we feel will be extremely successful in South Africa because there's a huge gap for this technology. And it would appear that we might be able to use the banking [inaudible] outside of South Africa; certainly in other surrounding territories therefore making it easier for us to enter other territories we [inaudible] to actually sign up a specific banking partner.

So all in all, thank you all very, very much for your support as well as your attention during this call and we hope to be speaking with you very, very soon again. Thank you for your time.

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