Lesaka Technologies Inc (LSAK) 2007 Q3 法說會逐字稿

Good afternoon, and welcome to the Net1 third-quarter earnings conference. All participants are in listen-only mode. There will be an opportunity for you to ask your questions at the end of today's presentation. (OPERATOR INSTRUCTIONS). Please note that this conference is being recorded. I would now like to turn the conference over to Dr. Serge Belamant.

Thank you very much. Good morning to our investors in the U.S. and good afternoon to our investors in Europe and South Africa, obviously. I thank you very much for joining us for our third quarter of fiscal 2007 earnings call.

With me today is Herman Kotze, our CFO. Both our press release and our 10-Q are available on our website at www.Net1UEPS.com, www.Net1UEPS.com.

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, May 11, 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. 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 that could cause actual results to differ materially from those in the forward-looking statements and projections are specified in our quarterly reports on Form 10-Q for the three to nine months ended March 31, 2007 that we filed on May 10, 2007.

In addition, during this call, we will be using certain non-GAAP financial measures as defined under the SEC rules. We are required by these rules. We have provided a reconciliation of those non-GAAP measures to the most directly comparable GAAP measures as exhibits in the press releases dated yesterday. After numerous meetings with investors and analysts, it has become apparent to Herman and I that our previous practice of presenting our results in U.S. dollars, which is GAAP and South Africa Rands or ZAR, which is non-GAAP, is confusing. Therefore, based on the request and recommendation of our investors and analysts, during this call, we will primarily discuss our results in the South African Rand currency, ZAR, which is a non-GAAP measure. We analyze our results of operations in our quarterly reports on Form 10-Q and in our press releases in ZAR to assist investors in understanding the changes in the underlying trends of our business.

The Company's results are significantly affected by currency fluctuations between the USD, the U.S. dollar, and the ZAR, the South African Rand, on the Company's results of operations and, therefore, for clarification purposes, I would like to reiterate that the use of South African Rand in a non-GAAP measure. And the appropriate GAAP presentation is included in our quarterly reports on Form 10-Q and press release, and we advise our investors and analysts to review the Company's results in terms of U.S. GAAP.

Finally, it is worthwhile noting that the South African Rand was significantly weaker against the U.S. dollar than during the same period of the prior year.

I would like to spend most of my time on the call today on providing feedback on our current business activities and opportunities, including the South African Social Security Agency or SASSA, after which, Herman will provide additional detail on our financials. We will then conclude as usual with a Q&A session.

In terms of our third-quarter fiscal 2007 results, I'm very pleased with the group's performance. In analyzing our results, we decided that it could be meaningful and useful to our investors to provide additional non-GAAP measures, namely the fundamental net income and fundamental earnings per share that eliminates among other adjustments the significant non-cash accounting increase required by GAAP for the present acquisition. These 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 deemed not to pursue.

On this basis, we recorded an increase in fundamental net income of 36% in [South African Rand] from ZAR102.3 million for the three months ended March 31, 2006 to ZAR139.3 million for the three months ended March 31, 2007, and an increase in fundamental earnings per share of 36% to 244.7 South African cents for the three months ended 31st March 2007 when compared to 180.2 South African cents for the three months ended March 31st, 2006.

There appears to be some confusion regarding the impact of the SASSA settlement in March of ZAR49 million paid to us during this third quarter on our earnings. Firstly, I want to make it clear that this amount is a cash payment that we have received. Secondly, this amount was paid to us as a result of [lasting] negotiations spanning several years regarding certain contract deviations in the province of the Eastern Cape. Herman will provide you with the exact detail of this amount impacted on our results, as you need to take into account the costs associated with the settlement as well as the recurring portion which is contained in this particular amount.

I'm happy to report that on Friday, May 4, 2007, 11 AM, we submitted our response to the request for proposal made by SASSA in February of 2007 for the provisions of the welfare payment system in all the provinces of South Africa.

As you are all, no doubt aware, this particular and specific business is, at this time, the most significant component of our activities, and as such, we have spent and will continue to spend most of our time on the tender process. And fortuitously, as this release states, we cannot divulge the details containing our tender responses. That is to say that we believe that our proposals are extremely comprehensive, competitive and progressive. Together with our track record, experience and expertise in this field, we should be very well-placed to retain or increase our current market share in this new tender.

There are some analyst reports, specifically the Morgan Stanley report of April 16 that provides comprehensive details on the risks, demographics, barriers to entry for this tender, and I'm not going to spend much more time reviewing these particular issues. We submitted a separate bid for each of the South African nine provinces as well as a proposal for the entire country from both a technological and operational point of view. During the next two months, we may be called upon to present our solution to the SASSA evaluation committee, for which we are currently very, very well-prepared. We await the award of the tender according to the SASSA timetable, which is scheduled for July 13 with cautious, but optimistic future -- with optimism.

During the third quarter, we made significant progress with the waste payment initiative with our partner, Grindrod Bank. During this short space of time, we have recruited and acquainted an executive team for this business. We have defined the product set which will be marketed to employers and employees. We have defined a marketing and sales strategy and most importantly, we have identified the area where we will launch the business activity and we have been in contact with the medium and large employees in this area as well as the unions, retail outlets and other participating stakeholders. Our intention is to manage the UEPS technology ubiquitous in the areas selected for all transacting activities. During the initial period, we will monitor our product range, pricing and technology, refine these, if necessary, and then scale this model across the selected province and then across the entire country.

In parallel, we have been assisting Grindrod Bank to become a member of South African National Payment System to ensure that our cardholders will be able to transact seamlessly across our, as well as the other, current technological platform. The process of accreditation takes some time, as determined by the Payments Association of South Africa. But please understand that this is not an approval process, but merely a compliant process. We do not believe that these processes will delay the launch of our initial implementation during the next three months.

In anticipation of our launch, we have also identified a number of channels either in the union and employers for which we will be in a position to acquire customers, such as community banks, reputable micro financiers, church groups and savings clubs. I know that there is some skepticism regarding the participation in some of the large retailers as either users of the wage payment system or as acceptors of our UEPS cards.

I would like to point out that as our card can operate in both UEPS and EMV mode completely transparently, any retailer would accept our customers' cards regardless of a decision to participate specifically with our payment technology. I think it is important to note that transactions that will be effective using non UEPS technologies would, in fact, cost retailers more as these transactions would be [in our price] at the interchange fees, which are set by the South African banks. We have successfully demonstrated the integration of our biometric and payment platform to the two largest retailers, Pick 'n Pay and Shoprite/Checkers. And we are in a process of finalizing commercial agreement with these two organizations.

On the international business front, our existing operations in Namibia and Botswana are gathering momentum and I am satisfied that progress is being made in line with our initial expectations. As far as Nigeria is concerned, I explained during the last earnings call that the Nigerian government has issued a tender for the provision of a smartcard-based identity system to NGN65 million, which has to include an electronic wallet application. Our UEPS solution has been included in the tender response of two of the last three bidders. We're being short-listed for the final evaluation process, which, itself, was delayed due to the national elections in Nigeria, which were held during the month of April. The newly elected government and president will be inaugurated during the next month, following which, the evaluation process should be completed.

During the third quarter, we also commissioned the system in Nigeria. We shipped the first 50,000 smartcards to our launch partners, Diamond Bank.

We have also appointed Mr. Pascal Dozie as a nonexecutive chairman of SmartSwitch in Nigeria. Mr. Dozie is also the chairman of Diamond Bank as well as MTN Nigeria, which is the largest mobile operator in Nigeria. As a result of our discussion, with a number of other Nigerian banks, we have applied for a multilateral switching and clearing license from the central bank of Nigeria to allow them to compete against each other using the UEPS technology. As a majority shareholder, we will continue to fund the bulk of SmartSwitch Nigeria setup costs, which we estimate to be approximately $2 million over the next two years. The timing on the profitability of this switch is of [yet be] dependent on the application's launch and the success of our partners in the identity card tender.

Our VTU implementation in Colombia and operational and in Vietnam we are busy with the interfacing of our VTU system in two of the mobile operators in Vietnam.

Other highlights of our international business development initiative during the last three months include -- we hosted the evaluation committee from the central bank of Ghana, who visited us to evaluate our solution, as we are one of the two finalists for the provision of the national integrated payment system, which must include a solution to bank the unbanked population of Ghana, around 20 to 25 million people. By all accounts, the evaluation committee members were very impressed with the completeness and scalability of our solution in both urban and rural environments.

We have reached the stage where we have submitted detailed business plans and all necessary [draft] contractual agreements to our prospective partners in Indonesian, Iraq, Tanzania and Mozambique. We have completed the development of our [prototype] mobile UEPS payment system, which we have demonstrated to a number of mobile operators, in Indonesian, Vietnam, the Philippines and the Middle East, where the technology has been acclaimed as the first-ever solution that uses a mobile phone as the actual banking account as opposed to merely an access, an input mechanism, to a traditional back-end-based account.

This mobile application will not only target the unbanked population of these countries, but also allow for the realization of significant revenues that can be generated through the so-called card-not-present transactions, such as payments through the Internet and telephone-based payments.

Finally, I reiterate my comments in our press release of yesterday that I expect our full-year results to be at the upper end of the previous guidance given and I firmly believe that the Company, through its various current initiatives, will unlock significant value for its loyal shareholders in the very, very near future.

I'd like to take this opportunity to thank you all very, very much for attending this morning and I would like to hand over to Herman for some financial analytics. Over to you.

Good morning and good afternoon to our investors around the world. I will be reviewing our third-quarter operating performance before turning to the results of our business segments. Our results for the third quarter of fiscal 2007 incorporate the results of Prism and the remaining 25.1% of EasyPay acquired effective October 1, 2006. Our results for the nine months ended March 31, 2007 incorporate the results of Prism and the results of the remaining 25.1% of EasyPay from October 1st, 2006.

In order to provide you with relevant information regarding the financial impact of this acquisition, we have provided you with certain non-GAAP measures in our press release, including the Net1 financial results on a stand-alone basis excluding Prism in Attachment B of the press release and we've introduced the measurements 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.

We have also included a frequently asked questions section in our press release for the first time to provide further clarity on the questions we are asked most often by investors and analysts.

Speaking of frequently asked questions, there is a new content in this category which relates to the impact of the SASSA settlements on our results.

Before I discuss the details of our financial results, I want to spend a bit of time on this tax settlement amount that Serge mentioned and the effect of this transition on our fundamental earnings per share. The settlement amount of ZAR49.5 million or approximately U.S.$6.9 million contains elements of a recurring as well as a nonrecurring nature. The recurring amounts are due to price increases that relate to the third quarter and will continue to have a beneficial impact on our fundamental earnings per share until the end of the current contract period and this amount came to U.S.$0.011 fundamental earnings per share included in the Q3 results. The balance of the settlement amount included in our fundamental earnings net of taxes and costs amounted to U.S.$0.044 per share. In other words, U.S.$0.044 of our fundamental earnings per share relates to a payment received for contract deviations in the past, and if you choose to exclude this number because you deem it to be nonrecurring, the fundamental earnings per share for Q3 equals U.S.$0.295 per share. In my view, it would be incorrect to exclude this amount specifically because of its nonrecurring nature, as we have many other nonrecurring revenues, such as hardware and software sales, that are not specifically excluded from the calculation of fundamental earnings per share and won't be excluded in the future. Again, for clarification purposes, I would like to mention that my following discussion will be based on our results in South African Rand, s this provides the best indicator of the group's actual operating performance and this is a non-GAAP measure. In order to review our results in terms of U.S. dollars and GAAP, please review our quarterly filing on Form 10-Q as well as our press release filed yesterday.

For the third quarter, our average Rand dollar exchange rate was 721 Rands to the dollar compared to 617 Rands to dollar for the third quarter of fiscal 2006 and slightly better than the 732 for the second quarter of fiscal 2007.

Revenue for the third quarter came in at ZAR441.7 million, up 51% year over year. Our gross margins for the year were strong, coming in at 77% for the second quarter of fiscal 2007 compared to 73% last year. Operating income for the third quarter of fiscal 2007 was ZAR209.6 million, an increase of 36% year-over-year. Our overall third-quarter operating margin of 47% was marginally higher than that of 46% for the third quarter of fiscal 2006.

Our operating income margin for the three months ended March 31, 2007 increased to 47% compared to 46% for the three months ended March 31, 2006, primarily as a result of the continued adoption of our merchant acquiring system, increased volumes and pricing in our pension welfare business and, of course, a settlement payment received from SASSA. The increase in our operating income margin during the quarter was reduced by the lower operating margins of the Prism business compared with our other operations and intangible amortization charges related to the Prism intangible assets acquired.

Our third-quarter net income was ZAR131.6 million, which is an increase of 29% year over year. GAAP earnings per share increased by $0.10 -- 10% sorry, from U.S.$0.292 in Q3 2006 to U.S.$0.321 in Q3 2007. In constant currency turns, GAAP earnings per share increased by 28% compared with Q3 2006. Fundamental earnings per share for Q3 2007 was U.S.$0.339 compared to U.S.$0.292 for Q3 2006, which is an increase of 16%. On a constant currency basis, fundamental earnings per share for Q3 2007 increased by 36% compared to Q3 2006.

Our effective tax rate for the three months ended March 31, 2007 was 38.2% compared to 37.9% for the three months ended March 31, 2006. The change in our effective tax rate was primarily due to additional nondeductible expenses during the three months ended March 31, 2007 compared to the three months ended March 31, 2006.

Now, let's 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, and Related Technology Sales. Our Transaction-Based Activities segments had revenues of ZAR295.3 million for the third quarter, an increase of 51% year over year on a dollar basis. In addition, our Transaction-Based Activities segment operating income of ZAR179.3 million is 77% higher than that during the third quarter of fiscal 2006. These increases in revenues and operating income were due primarily to the continued adoption of our merchant acquiring system in the provinces where we distributed welfare grants, increased transacting ability at participating retailer's point of sales devices in these provinces, higher volumes from all our provincial contracts, the settlement payments received from SASSA and the inclusion of transaction fees generated by EasyPay. The total number of payments processed to beneficiaries increased from 10.7 million for the third quarter of fiscal 2006 to 11.4 million during the third quarter of fiscal 2007, an increase of 6%. Sequentially, the total number of payments processed to beneficiaries was comparable with the 11.3 million for the second quarter of fiscal 2007. The largest increase was in the KwaZulu-Natal province.

We experienced seasonality in our Transaction-Based Activities operating segment. Our beneficiaries are able to load their grants onto their cards as soon as the grant payments file is activated, which typically happens during the week preceding the commencement of the [current] month. We recognize the fee revenue related to the distribution of welfare grants when the beneficiaries load the grants to their cards. The general exception to this rule is the January payment cycle, when the activation of the payment file is done on a limited basis, at merchant locations only. As a result, the revenue recognized in the second quarter of our fiscal year is generally lower than the other three quarters, due to the limited number of grants distributed during the last week of December. The activations of payments filed for any month also depends on whether the first calendar day of the month is a week day or a Saturday, Sunday, or public holiday.

During the third quarter of fiscal 2007, we have processed a total of ZAR1.7 billion in transaction volume through our merchant acquiring network completed just ZAR1.2 billion during the third quarter of fiscal 2006 and ZAR1.4 billion during the second quarter of fiscal 2007, all on a calendar month basis. The productivity of our installed terminal base of 4179 terminals continues to improve with than average of 807 transactions processed per terminal during the completed phase cycles of the third quarter of fiscal 2007 compared to 584 during the third quarter fiscal 2006 and 683 during the preceding second quarter of fiscal 2007.

The movement from the comparable period in fiscal 2006 demonstrates the rapid continued acceptance rate of our cardholders as they become familiar with and accustomed to the convenience associated with our merchant acquiring initiative as they can receive and spend their grants at any time of the month.

During the three months ended March 31st, 2007, EasyPay processed 109 million transactions, with an approximate value of ZAR24.3 billion compared with 117 million transactions processed with an approximate value of ZAR27.2 billion during the three months ended December 31, 2006. That is the previous quarter.

The average fee per transaction during the three months ended March 31, 2007 and December 31, 2006 was approximately 21 South African cents. The fees related to the three months ended March 31, 2006, are not included in our results for the three months in the preceding year period as we acquired EasyPay effective July 3rd, 2006. We do not expect a significant fluctuation in Rands in the average fee per transaction during the fourth quarter of fiscal 2007.

Our Smart Card Accounts segment had revenues of ZAR62.4 million Rands for the third quarter, an increase of 6% year over year. The total number of active Smart Card Accounts increased by 6% from 3.6 million during the third fiscal quarter of 2006 to 3.8 million during the first quarter of fiscal 2007. Sequentially, there was marginal growth in active Smart Card Accounts from the second quarter of fiscal 2007 to the third quarter of fiscal 2007. And this, of course, is a result of the fiscal year end of the South African government, which always results in marginal growth in the number of beneficiaries serviced as the government reaches the end of its fiscal year, which coincides with our third quarter.

Our financial services business had revenues of ZAR20.6 million for the three months ended March 31, 2007, which is a decrease of 21% compared to the third quarter of fiscal 2006. Our traditional [earning] business continues to remain static as part of our strategic decision not to grow this segment.

Revenues from UEPS [by standing] decreased during the three months ended March 31, 2007 compared with the three months ended March 31, 2006 primarily due to the lower number of loans granted during the three months ended March 31, 2007 compared to the three months ended March 31, 2006. In addition, on average, the rate of interest charge on the UEPS [base] loans was lower during the three months ended March 31, 2007 compared to the three months ended March 31, 2006.

The final operating segment is our Hardware, Software, and Related Technology Sales segment. This segment traditionally includes revenues that occur on an irregular once off basis and, it can be difficult to predict sales from year to year. This segment includes the sales of UEPS related hardware and software as well as the Prism sales of subscriber identity modules or SIM cards, cryptography services and SIM card licenses. The segment had revenues of ZAR63.4 million for the third quarter of fiscal 2007, which is an increase of 14%. Overall, the operating margin of the segment declined from 60% for quarter three of fiscal 2006 to 11% in the third quarter of fiscal 2007.

In order to understand the main drivers behind the significant decline in margin, 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 26% during Q3 2007. Our third-quarter of fiscal 2006 results included non-recurring sales of approximately ZAR27.4 million to Nedbank Limited, which contributed to the higher margin in the prior period. The Prism results on a stand-alone basis resulted in an operating margin of 6% during the three months ended March 31, 2007. The lower margin was mainly the result of the allocation of the amortization of Prism's intangible assets to this segment. If we exclude the effects of this amortization charged, the overall operating margins for this segment improves from 11% to 22% for Q3 of fiscal 2007. Prism's operating margins in this segment continue to be negatively impacted by some manufacturing activities and we expect this strain to continue in the foreseeable future.

Turning to our balance sheet, as of March 31, 2007, we had $118.9 million of cash and cash equivalents. I remain comfortable that we have sufficient liquidity between our [first] acquisition of cash and cash equivalents and our current credit facility to fund our working capital requirements for the next four quarters. We are always evaluating the best use of our cash reserves to enhance shareholder value, including the implementation of a share buyback program when appropriate. It is worth mentioning that our prefunded social welfare grants receivable balance is higher as of March 31, 2007 compared with June 30th, 2006. This is due to the April payments service that commenced during the last three days of March 2007, which was offered at government paypoint Internet merchant locations. Our goodwill and intangible asset balances have increased compared with June 30, 2006 as a result of the acquisition of Prism and the remaining 25.1% of EasyPay during the nine months ended March 31, 2007. The increase in our payables is due mainly to the reimbursement due to merchants for distributing grants to welfare beneficiaries related to the April pay cycle, which commenced in the last week of March 2007.

The acquisition of Prism and the remaining 25.1% of EasyPay has resulted in an increasing goodwill on our balance sheet of $69.7 million and a net increase in intangible assets net of amortization of U.S.$26.8 million.

With that, we will be happy to take your questions. Operator, please proceed with the Q&A now.

(OPERATOR INSTRUCTIONS). Dave Koning, Robert Baird.

Nice results. First of all, I just wanted to pursue the number of grants, that had been growing year over year by about 9% to 10% over the last few quarters and this quarter it was a little lower; it was at about 6%. I'm wondering if anything has changed in that growth rate, and I know you're getting some extra beneficiaries coming on in a couple of quarters, but maybe you could just talk a little bit about the dynamics there.

Thanks for the question. It's very, very difficult in South Africa to predict the top of the growth rate or at least to actually smooth the growth rate over the period of quarters simply because SASSA and the different provinces tend to have certain objectives in each province, so they look at the province. They, for example believe that one province might be a little bit behind in child grants. It might be behind in all [base] grants. And they put together a team of people that go out and market in that specific province and then suddenly you're going to see that there is a sudden take-up of people in, for example, North West. Now, while this is going on, nothing much is going on in some of the other provinces. And then they will start looking at the next province or the next province. So it's a little bit irregular.

What we have been told officially over the last couple of weeks is that there is a definite drive by SESSA and the minister, Dr. Skweyiya to in fact visit all provinces. And we are in a way quite lucky because they happened to be all ours, mainly the North West, the Limpopo province, the Eastern Cape and KwaZulu-Natal, where they are at the moment driving an initiative because they believe that child grants are way below where they should be and visibility grants are actually way below where they should be. So they have actually prewarned us that we can be prepared for a fairly significant increase over the next -- before, in fact, June, which means in the next two months or so -- they are telling us that we could expect 20, 30, 40,000 beneficiaries to come in each of these provinces, which could easily add another 200,000. And this is some of the things that actually happened within South Africa, whereby it is very, very difficult for us to actually predict when the pickup is going to happen. But over a year or two years, it smooths out and we pretty much get the averages or the percentage increase that we've been talking about.

Dave, maybe I can just add to that. The only source we have to base our projections on, and obviously then having just gone through the [faster] tendering process, one of the key drivers of any pricing and CapEx decision that one has to make looking forward, of course, would be the number of beneficiaries that we would anticipate to have. And, of course, we asked SASSA for the exact number of beneficiaries to assist us with the tendering process, not us, but I think all the other tenderers and of course they couldn't give those to us because they don't know themselves, I think.

So the only real indicator we have is to look at some of the government published documents. And the first one is really the SASSA strategic plan, which I think you can get off their Web site. And this plan obviously shows a budget going forward I think to over a five-year period and it shows you what they anticipate the increased spend will be on social wealth welfare grants. Now that, of course, does not translate directly into the increase in the number of beneficiaries because the spend is a function of the number of beneficiaries as well as an increase in the grant amounts, and they don't tell what the difference is between those two things are. Or if they plan to introduce a new grant, as an example. But we are assuming that the grant amounts will increase by something that's equal to our local inflation rate of around 5% or 6%, and working backwards from those numbers, it appears as if these guys are projecting a 12% sort of growth rate over a five-year period, annual growth rate, over a five-year period in terms of the value in Rand that they plan to spend on social welfare grants. That appears to correlate more or less with the medium-term budget that is published by the Department of Financier on an annual basis, and that looks forward three years in terms of what the national spending patterns will be. And if we look at what's contained in that document, it also seems to support that kind of number.

Now, what we always see, again, as I've said before, during the third quarter of every one of our fiscal years, the government's year end in South Africa is in March and inevitably, normally, during each one of these periods, as we get to February and March, and clearly with the budgets running low, we find that they put fewer people onto the welfare system than is normally the case and I think that would explain why the growth rate in the number of beneficiaries for the third quarter will probably lag behind the other quarters, and that will be true in any fiscal year, I think. But even so, there has still been a marginal growth in this quarter, and I think it's just under 1% quarter over quarter. And so those are the sectors that we have to consider and if you are trying to model this yourself, then I think that's the only real source that you could use.

That's very helpful and if I might just follow with a housekeeping item. You mentioned in your guidance comment, the top end of the fundamental EPS growth range I think used to be 20 to 25%, you mentioned the top end. Is it fair to take out about 5% or so for the nonrecurring piece of this settlement fee, so that would kind of move it closer to the 20% if we exclude that fee? Is that fair?

I don't think the fee itself accounts for [fast receipt] of the growth that we were looking for, unfortunately. So I think as a general statement, if you excluded the nonrecurring piece, we would still probably be very comfortable to say that our EPS target would remain at the upper end of the 20% to 25% range.

Great, thank you.

Dhruv Chopra, Morgan Stanley.

Thanks for the Q&A section on the press release. That was very helpful. Just wanted to touch on a comment that you made both in the press release and on the call this morning, Serge, on unlocking significant shareholder value in the near term. Can you elaborate on that? Just provide a little more color on what you're talking about?

I think, Dhruv, a lot of the stuff I have been talking about is already included in the capful of models which we've seen or at least that we've been reading on the capful of analysts' reports. But really at the moment, what we are seeing through our marketing efforts, not only on the South Africa front, because as you know, the South African business model is a little different than what we're doing internationally, considering that the South African business model is really a switch itself. But where we are now marketing or at least our international marketing team are going around, we're finding that specifically the UEPS/cell phone initiative has been picked up as probably one of the single most exciting products that has been seen in developing countries for a long, long time. We are looking at this not only as a means of, again, banking the under-banked for UEPS but without necessarily giving them a card, considering that the card is in the phone.

But what is more exciting for them is also to be able to utilize a cell phone technology to grow what is commonly known today as these card-not-present transactions, which, funnily enough outside of countries like the U.S. and Europe and let's call them first-world countries, those transactions simply do not exist. Now they are the easiest transactions to implement if you add a secure method of actually conducting them.

The reason why they are so potentially viable is one, it's very simple to actually switch on a specific vendor or a specific merchant because anybody could dial in with any normal phone today and make a transaction over the phone at simply only one terminal on the other hand. So the deployment of the technology is very, very simplistic and very low cost, but the volume of transaction and the size of transaction is incredibly high, and we believe that under the new model that [Branzair], our marketing director has been working on, which involves transaction fees as well as equity in specific switches. We believe that our shareholders should be able to realize even quicker and certainly bigger benefits than what we anticipated in the past.

Okay, great. So you are basically looking for improving fundamental performance as opposed to being created in terms of share buybacks or uses of cash, etc.?

Absolutely, we always focus as you know on the business, but I think the [lowmans] lifting the [lie], which I'm sure a lot of people picked up, whereby the Company at this point in terms of our Board, we have approved a share buyback activity simply because at this point in time we actually believe that the stock is undervalued, and as such, we actually think that it certainly would be beneficial to all of our shareholders, including Kennedy management, if we had to start taking some of that loose stock off the market in order to get to a price which I think is far more commensurate with what we are currently doing, our current performance and where we are going.

And can you share roughly how big of a program you're talking about?

At the moment I don't want to disclose anything, but I think you know us by now that when we do something, we tend to sort of put our hearts and soul into it. So if we are going to commence some activity, we have no intention of making it and buy back 1,000 shares.

Okay. I'll just ask one other question. The welfare minister, Dr. Skweyiya has recently been talking about standardizing the technology in South Africa. Did that factor into your tender proposal? And how do you expect SASSA to implement something like that?

Again, Dhruv, I think you have some -- you obviously read a lot of information and that's actually quite nice to see.

There is no doubt that the tender in many, many places talks about being able to provide a ubiquitous platform for all 10 million beneficiaries to be able to transact regarding a way they may live and I was to pay the right person at anyplace at the right time and to make sure that he is the right person. So that would imply that the technology platform across the entire country should be the same or at least that any platform that is implementable or implemented should be able to interoperate with any other platform.

Now, obviously, we took that that as, because, as you know, we did not file nine tenders. We filed ten tenders and there are only nine provinces. So one of the national tenders that we also filed certainly also offers a national technological platform as well as nine individual operational solutions. So we have taken that line by Dr. Skweyiya very, very seriously, and certainly are pushing and are tendering and we believe we can deliver a technological platform that will be able to serve the entire country regardless of who the actual operational payment contractor would actually be in each province.

Okay, great. And then just the last quick housekeeping question. When are you expecting -- are you still expecting the 320,000 beneficiaries in the North West province to come on line for the May and June pay cycles?

What has happened is that I think we did answer the question as well in the Q&A. What has happened is that in theory, we should have paid these people let's say this month. And the North West province has been under a little bit of pressure from a Social Security point of view, where there has been quite a few hiccups. Nothing to do with, funnily enough, with a payment of welfare, but a number of other activities. So they decided to actually withhold the transfer of the beneficiary for this month.

What they have done, which is actually interesting, is they've given us a free month at the end of the period, which tentatively we thought was rather strange considering that all tenders, as you know, were supposed to expire at the end of March of 2008. Well now the North West is actually only expiring at the end of April of 2008, which of course, is interesting considering the new tender talks about all tenders commencing on the 1st of April of 2008. So SESSA decided to give us an extra month in order to make up for the month that we have lost. And we've already pretty much enrolled more than -- I think today we probably have around 200,000, upwards of 320,000 people. So we will be ready to pay everybody next month, and we have been told that the entire payment file will be transferred to us on the 17th of this month. So everything seems to be going according to plan except for a small delay, which candidly, when you're talking about so many people and you're talking about welfare and you're talking about politics is I think a very, very short delay.

Okay, great. Thank you very much.

(OPERATOR INSTRUCTIONS). Mark Sproule, Thomas Weisel Partners.

Thanks. I guess if we try to normalize for the settlement fee, what would you -- assume it's not inclusive, the recurring part is not included in your average payments per beneficiary, as you've disclosed.

Sorry, Mark?

I guess I'm trying to figure out what the average payment per beneficiary, the recurring piece from the settlement is not included in that number? In sort of the fees that are in there?

No.

Okay, so then when we go forward, how much of the piece would increase. Obviously you're getting an incremental fee per beneficiary on a good-forward basis.

That is correct. So there is an incremental fee specifically relates to the Eastern Cape. And so on the 650,000-odd beneficiaries that we have in that province for the next period until the end of March next year, we will show and record additional revenues of approximately 350 per beneficiary per month.

Okay, that's helpful. And then on the margin side, if you were to x this out, obviously it has a tremendous -- where do you see sort of a normalized run rate margin in the transaction business going longer-term?

Well, that, of course, is -- and if you say longer term, I'm assuming that you mean post the current contract periods?

Yes, I mean even all of next year and then yes, how do you see it sort of progressing? Obviously you have had some real strength in that part of your business.

Yes, sure. Obviously, the visibility we have until the end of the current contract periods, which is really this time next year, so Q3 '08 -- up to that point, I think we will see the current margins remaining at the sort of levels where they are. Obviously, the settlement did push up our margins in this quarter. And of course, the margin now is a mix of what Net1 does mainly in the pension and welfare business and what Net1 does for EasyPay, which is a much lower margin business.

But if you look at a blended margin, I think that we're still pretty comfortable that we will remain at the sort of levels that you are currently seeing in the -- specifically in that segment, which I think is at the sort of 57% level thereabouts. So I think over the next four quarters or three quarters, we should remain at the similar sort of between 50% and 60% margin levels, depending, obviously, on events that may or may not occur if you think of the North West province, about one item that will have an impact on our margins, for a quarter or so will be the initial setup and registration costs that we are incurring as a result of bringing the 320,000 people on. We obviously have to issue those guys with a smartcard and will depreciate the smartcard over a very short period of time, so that may have a short-term detrimental impact, but in the bigger scheme of things and because of the size of that segment, I don't think the margins will suffer greatly as a result there.

Okay, and then would the launch of -- or expected launch over the course of this quarter of your wage payment platform, is there any incremental cost in that that could be another negative, at least in the shorter term frames? And then as you build out, obviously expect to get towards, on that side of the business, towards margins of your broader Transaction business?

I don't think that -- you've got to remember the way in which we price this thing, we are going to be receiving a cost fee from Grindrod that should cover ongoing operational costs, at least. In terms of the initial costs, we have committed and paid an amount of ZAR5 million into the bank to assist them, and they've contributed a similar amount. So between the two of us, we've put up ZAR10 million for the establishment and the initial activities, marketing drives, the license and registration fees we have to pay to all the regulatory bodies. But we don't anticipate that amount of ZAR10 million or ZAR5 million each to be depleted in the near future. I think that it's more than enough to [gauge] before the initial costs.

Got you. Thank you.

Joe Vari, Hunter Global.

Thank you first for taking my questions. First, I wanted to ask you about the share repurchase. Haven't seen a press release, so have you got Board approval yet? Or if not, when do you expect to get Board approval?

It's something we've been playing with for quite awhile. Simply because we, as I say, as I've mentioned before, because we feel that our stock at the moment in our view is really underrated. And we had, because of this particular quarterly event, we just had a Board meeting and we are busy putting in place at the moment the ratification of the Board. I know that in principal everybody is in favor, and right now we are busy putting all of the legal papers and agreements and getting our attorneys, that are going to, I think, release and draft the press release in the next -- probably today or tomorrow at the very late -- or on Monday at the very latest. So that is something we're certainly want to put in place immediately, with immediate effect, and then we will commence on our -- we will have, of course, to quantify then [did fight] and then we will commence with this particular initiative, which we think at this point in time would be money well spent, to be quite honest.

Okay, great. Thank you for that. And then, I wanted to ask you, your [Skybro] group had been running at 6 to 9% range. You mentioned you had a recent win and you're saying you have additional 200,000 possibly coming along in the next couple of quarters, so what do think that does to your subscriber growth?

It's going to be very, very interesting and if we can pick up in the next two or three months another 200,000 people, on the base which is I think close to 4 million now.

3.8.

3.8 million. So it will put us, it's another more than 5% growth in the next couple of months, which would be absolutely fantastic.

We know that, like Herman said, if you're going to try to piece everything together, it's difficult to get one site as a treasury or welfare, which at the end of the day you've got to try to piecemeal all of those things together, together with government press releases to actually try to really understand at the end of the day, what they are going to do. In other words, how much more money are they going to put towards welfare and then to try to translate that back into beneficiaries.

In some provinces it doesn't matter because we get a percentage of the amount that we disburse, but in other provinces, we get paid by grant. In other provinces, we actually get paid by beneficiary pay. So for us, we do a hell of a lot of statistical analysis of all of these inputs to try to put them into a pot and to try to see if we can get to a number that makes some sort of sense. So yes, we think in the next couple of months, we could easily pick up 100, another extra 100, 150,000 people quite comfortably. And then, of course, it will be a question of seeing what happens between let's say June of this year, end of our financial year and first and second quarter of next year.

And there again, we expect some further growth, because, as you are probably aware, there is a fairly serious ANC election in December. And there's absolutely no doubt that normally, associated with elections, you normally find that there is always a drive to pay Social Security and [patients] on the welfare. So we are planning -- in our minds, we have set some sort of targets, but time will tell if we are accurate or not.

Okay, thanks. And finally, you put out some targets on the wage payment initiative. You set up a team. I assume you talk to some potential customers. Has your confidence level increased relative to those targets that you set out? What are you seeing in terms of your conversations and your further study on this, on the [WPS]?

Well, I'm actually quite excited about it and the reason why I am is because now we've got two teams of people that are actually looking at this thing. We've got a team from Grindrod, and, of course, a team from Net1, which is quite good, because before, we were a little [bit a load]. And now we're getting two different views by two different groups of people that comes with two completely different backgrounds. And, Kennedy, I think they are even more bullish than what we were. They, certainly, in the province that we believe we're going to launch this fairly sizable balance, for lack of a better word, where we intend to capture an entire town, and basically convert it into a UEPS town, whereby you're not going to be able to do anything in that town unless you have a UEPS card.

Certainly, I think, between Grindrod and ourselves, they pretty much [focused on] every single body that exist in that environment and we haven't had one of them yet that is negative about it.

So I believe the figures we've put out, I still believe, although that they look aggressive when you look outside because you are talking millions of people, that's a lot of people, I think everybody here and specifically that is driving this initiative is convinced it's achievable.

Thank you for taking my questions.

Dave Koning, Robert W. Baird.

Just a few --

That is no problem, David.

In Prism, the hardware segment generated a profit this quarter and you had lost it in Q1 and Q2. I'm just wondering, are profits going forward, kind of the expectation from Prism in terms of the hardware segment?

David, again, remember that Prism, our acquisition of Prism I think we had described the reason why we bought Prism, and I can assure you it had nothing to do with the hardware.

There is absolutely no doubt that wherever we believe that Prism can sell hardware, which at the same time is going to give us an entry point for us to put in UEPS, then it is something the we're going to push very, very hard.

Now, they do have a couple of interesting initiatives. One of them, for example, is in India, where they have been retained through a couple of other parties to provide solutions in the oil industry, in the fuel industry. And there is no doubt that there are a few of these initiatives that are quite encouraging and exciting. But right now, we are not driving products in terms of hardware products through Prism for the sake of making a one-off margin on selling the terminal. We're not doing that, David. We are more interested in, can we drive it in such a way that we will make a little bit of hardware, but at the same time we will start generating some UEPS transaction fees. So I don't know if that sort of -- it at least gives you the philosophy. Herman can give you little bit more detail.

Yes, I think by its very nature, the hardware and software segment obviously is lumpy, isn't it? And we believe that the Prism hardware and software or specifically the hardware sales business will continue to show lumpiness. The main activities in that area of course include the sale of terminals, certain entry devices mainly. And of course we have the SIM card plant. Now that is something that is extremely lumpy in terms of bulk orders received from our international mobile clients. And then, of course, we also have the cryptography business unit, where those sales are also quite lumpy in terms of when many of the banks and many in South Africa, the ones that are migrating towards EMV, as and when they require those cryptographic modules to be delivered. So it's very difficult for us to forecast where we believe those sort of numbers will be.

So is to say that again with the benefit of hindsight and a bit of trend analysis, we don't believe that there's any, there is going to be any significant fluctuation in the profitability of this segment for Prism going forward. There may be in terms of revenue. That may come down, but I think at the same time, we will try to improve the margins, so that the effect is neutral or positive.

Thanks. And if I might do one quick follow-up. That's great all the detail you give on the equity affiliate line within your 10-Q. In most like Botswana, Namibia and Colombia are generating quite small losses right now. Should we expect most of those to start going into profit mode during fiscal '08?

Well, the rule of thumb that we use and if we look at the business plans for all of those territories, is that normally, these businesses become --- or they break even after 12 to 18 months of commencement of operations.

Now, all of the ones that we currently include in the equity accounted line, Namibia is the closest to that date. Namibia has been running now for 12 months. It is approaching the break even point, in line with our initial expectations, so I think Namibia, over the next fiscal year, you will see that going from a startup loss position to a positive revenue generator. Botswana has been operational now almost for six months. Still obviously in startup and in other words, in loss making mode. But I think in Botswana, we may well see that the breakeven point is reached earlier than the 12 months or 12 to 18-month period.

And Nigeria is obviously a different [capful of fish]. You don't see those separately split up in the equity accounted line because it's fully consolidated. But as far as Nigeria is concerned, we have made the assertion that it is a business in which we believe we will have to invest roughly U.S.$2 million in terms of startup losses. That obviously is being monitored on a daily and a weekly basis from the head office over here. So I think it's going to take a while obviously before Nigeria breaks even and becomes profitable, considering that it only became operational, the switch was only really commissioned in this quarter.

So, and of course, if the I.D. tender is awarded to our consortium, things will change dramatically as far as that is concerned. But generally, as a rule of thumb, in those businesses, we see a breakeven period after 12 to 18 months and then you have the same sort of revenue growth profile that you have seen for Net1 in South Africa.

Great, thank you.

Gentlemen, that was our final question. Would you like to make some closing comments?

Right, well, I think, once again, we would like -- we hope that we keep on trying and everyone keeps on trying very hard to try to clarify and to make as many disclosures as we possibly can. In fact, some of our investors told us that think we disclose too many things.

At the end of the day, I think it's important that people understand or specifically our investors understand more and more the nature of our business and in fact, how difficult it is to achieve what we do achieve when we enter into a specific country. We're not selling a product. We are actually changing the way actually banking operates in a particular country from basically government to central banks, to banks themselves, to operators, to retailers, to employers. So it is a massive undertaking, and I think we're getting pretty good at it, and it's becoming extremely, extremely exciting. And on top of it, I think our credibility is getting well-known and we are starting to really hit some big countries.

I feel that we are really now starting really, it's the dawn of the UEPS as a payment system worldwide rather than the leveling of it. I think we're still very much at the beginning of what we can achieve rather than in the middle or at the end of it. So for all of our investors that take the time to follow our Company, and that have been with us a long time, thank you very, very much for your support. And to all of you that have attended the call today, we certainly appreciate at least being able to engage you and for you to be able to ask the type of questions that somehow we can answer and make it easier for everybody to understand what we are doing and why we're doing it the way we are doing it. So thank you all very, very much for attending and we look forward to talking to all very soon.

Thank you very much. On behalf of Net1, that concludes this afternoon's presentation. Thank you for joining us. You may not disconnect your lines.