Lesaka Technologies Inc (LSAK) 2007 Q4 法說會逐字稿

Good afternoon and welcome to the Net 1 conference. All participants are now in a listen-only mode. There will be an opportunity for you to ask questions at the end of today's presentation. (OPERATOR INSTRUCTIONS). Please also note that this conference is being recorded.

I would now like to turn the conference over to Serge Belamant. Please go ahead, sir.

Thank you very much. Good morning to investors in the US -- United States, and good afternoon to investors in Europe and South Africa. Thank you for joining us for our fourth quarter of fiscal 2007 earnings call. With me today is Herman Kotze, CFO. Plus our press releases, I think are available on our website at www.net1ueps.com.

We will be making forward-looking statements on this call, and I call your attention to the cautionary language contained in our press releases regarding the risks and uncertainties associated with forward-looking statements. In addition, during this call we will be using certain non-financial measures as defined in the SECC rule. Where required by this rule we have provided a reconciliation of the non-GAAP measures for the most directly comparable GAAP measures and exhibits in the press release dated yesterday.

As mentioned on our previous call, it became apparent to Herman and I, that our previous of presenting our results in United States dollars, which is GAAP, and South African rand, which is non-GAAP was confusing. Therefore, based on the request and recommendation of our investors and analysts, during this call we will primarily discuss our results in South African rand which is a non-GAAP measure. We analyze our results of operations in annual reports on (inaudible), and in our press release in South African rand to assist investors in [ascertaining] the changes in the underlying trends of our business.

The company's results are significantly affected by currency fluctuations between the US dollar and the South African rand, and the company's results of operations, and therefore for clarification purposes I would like to reiterate that the use of South African rand is a non-GAAP measure and the appropriate GAAP presentation is included in the annual report on Form 10K and press release, and we advise our investors and analysts to review the company's results in terms of US GAAP.

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

Now in terms of our fourth quarter fiscal 2007 results, I am actually very, very pleased with the Group's performance. In analyzing our results, as you know, we provide additional non-GAAP measurements, namely fundamental net income and fundamental earnings per share, that eliminate amongst other adjustments the significant non-cash accounting entry recorded by GAAP for the Prism acquisition. On this basis we recorded an increase in fundamental net income of 56% from ZAR100.1 million for the three months ended June 30, 2006, to ZAR135.9 million for the three months ended June 30, 2007, and an increase in fundamental earnings per share of 37% to ZAR0.0238 for the three months ended June 30, 2007 when compared to ZAR0.0174 for the three months ended June 30, 2006.

As this is our fiscal year earning call, I believe it appropriate for me to reflect on our activities and achievements during the last year, and all these represent key building blocks and [fitting] into our business strategy. Herman will then provide additional details of our financials, and as usual we will complete with a Q&A session.

We commenced the 2007 fiscal year with the acquisition of Prism and immediately commenced (inaudible) integrating Prism's business activities into our own. I'm happy to report that the integration process is now complete, and that we have already realized some of the synergies taken strategic benefits we anticipated at the time of the acquisition. To recap, our two main strategic objectives with the acquisition of Prism were and still are, one, the utilization of the EasyPay, two, create a larger footprint for the acceptance of UEPS card, b, open a [retailers] range of evaluated services such as a bill payment, (inaudible), electricity, loyalty, [life] insurance and, c, to direct EasyPay to all the model (inaudible) on value add rather than worked before, and I'll explain that a little bit later.

In terms of two of our largest retailers, namely [Pick and Pay] and [Shop Price], we currently have installed our technology in more than 73 stores, and process more than 73,000 transactions with the value of ZAR37.9 million on a monthly basis and that's ZAR37.9 million on a monthly basis. We are currently performing this transaction to extend a lot of terminals, but have commenced the integration of the UEPS in these retailers proprietary IT platforms. This start required the integration of our fingerprint readers, the upgrading of the retail and POS software, and modifications to [block] the switching (inaudible) system. These changes were completed and (inaudible) has commenced in certain stores. Benchmarks have now demonstrated that the speed of our UEPS transactions is at least three times faster than the debit card transaction, and up to six times faster than the credit card transaction. It is also faster than cash, simply because there is no counting of money required. The security level, of course, of our UEPS transaction is also far greater than debit and credit card products, as UEPS relies entirely on biometric verification rather than PIN numbers.

We are also currently negotiating strategically with a number of large retailers to investigate as to how [renting] fees in general could be reduced for the benefit of the retail industry and all consumers. This specific direction has been well received by most retailers, and detailed proposals have already been tabled and are currently under discussion. It is key for all to understand that we can (inaudible) interoperate with current platforms, and that UEPS integration is simply better, faster and cheaper than what is available presently. We are thus not dependant on general acceptance but rely on our added value proposition to encourage retailers to join our initiative.

We have also developed our evaluated services, performed tests, and commenced large scale implementation. This initiative protects the smaller merchant stores that today pay high requirement fees to accept Visa and Mastercard based transactions. It is clear that these merchants are always taking new products that will generate new income streams, and we are well placed to satisfy this new requirement.

This new footprint will in turn also become a fundamental piece of our UEPS acceptance network, specifically in urban areas of South Africa, as well as areas in which we have no footprint currently.

Lastly, we have also reconstructed the EasyPay business plan to transform the company from being just a processor to that of a business channel provider. We have already commenced the migration process to this new model, and have initiated a number of ventures in which we would have an ownership and will thus benefit from the business generated rather than the transactions per sale.

Due to the integration of our UEPS software into Prism GSM chipset has already been completed as a java applet, and it is now possible to perform UEPS functions such as loading, spending, cash dispensing, automatic debit and automatic credit on the GSM mobile phone. As a result mobile service providers will be able to offer their customers an [announced] service that includes the ability to transact using their phone, while opening a channel to financial service providers to deliver their product and recover payments or premiums from mobile handset owners.

In this regard, we are very excited about our new (inaudible), with this private solution designed to bridge seamlessly the mobile phone to existing payment infrastructures such as AGM, point of sale devices, the Internet and voice channels. We recently commenced the process of commercializing this technology, and we have appointed some industry experts to assist us in this regard. I truly believe that this technology has the potential to exhibit (inaudible), the worldwide payment processing industry. This new technology from innovation has already been accepted by the Central Bank of Ghana who will become our first customer, [last date] is planned for some time towards the end of the year, towards the middle of December.

The next slide highlights the 2007 fiscal year. With of course the deal we concluded with [Greenrod] Bank, during January, that allows us to implement our wage payment solution in South Africa through the newly formed retail division of [Greenrod] Bank. Together with our partner, we commenced with the establishment of a division during the first quarter of fiscal 2007. During this phase the relevant technology core platform has been or will be installed or integrated between Net 1 and [Greenrod]. [Greenrod] Bank, with our intimate assistance, has initiated a very complicated and detailed process that will enable it to become a fully fledged member of the South African national payment system or NPS and the [valued] payment clearing houses or PCHs in South Africa.

Significant progress was made in this regard during the fourth quarter of 2007. To give you an example of our project plan, to achieve these goals consistent (inaudible) of 150 different tasks that were both initiated during the last six months. The key milestones already achieved in the payment association of South Africa or PASA is granting [Greenrod] provisional membership. We expect the process of obtaining membership of the various PCHs, the payment clearing houses in South Africa, to be completed during the second quarter of fiscal 2008. These approvals will put us in a position whereby we will be able to launch our wage payment system activities on a large scale. In parallel, we have defined the product pricing and marketing strategy for the wage payment system and we have commenced pilot operation in specific areas and with specific customers, mainly in the agricultural sector.

Our deployment is going fully to plan, and our target, which is to have a customer base of at least 1.5 million customers within three years of operation, remains unchanged. We are also working very hard in defining large distribution channels to ensure that rapid market penetration can take place.

I must reiterate that in my view the growth rates in a number of wage payment card holders will be lumpy -- lumpy but ultimately exponential. And then, if you're unrealistic and probably incorrect, to attempt to credit quarterly growth rates in numbers, we have a team of dedicated managers in the Bank's retail division who have been entrusted with delivering this target, and I have full confidence in their ability.

The next major event for us was the preparation and planning of (inaudible) tender responsible mainly for 2007. With the (inaudible) proposal for each one of the South African nine provinces, in a separate proposal for the country as a whole. PASA provided an indicative (inaudible) of the evaluation of the tender proposal, and the award of the contract to successful bidders. But some of the key dates have, as you know, been missed. According to the tender specification the new contract will commence on April 1, 2008 and our existing contracts have all been extended to March 31, 2008. We're expected to complete the tender evaluation process before the end of December 2007, or otherwise extend the existing contracts.

When (inaudible) is ready to make a final decision, I've considered that we will maintain or grow our existing market share in a social grant payment business in South Africa for the following main reasons.

One, our successful track record of our existing provincial government contracts over an extended period of time, some dating back 15 years, and the enormous amount of human and financial capital we have invested in this business over the years has created naturally, very, very high barriers to entry.

Two, our unique and proven UEPS technology and biometric identification system that enables us to take a picture of blind payments, especially in rural areas where communications infrastructure is limited or simply non-existent.

Three, our unique solution that gives [PASA] the flexibility to utilize [barriers] distribution network and methods to contact beneficiary registration, electronic voucher generation, electronic voucher distribution, food for life and (inaudible) and payment transacting. Our solution is based on simplifying the existing processes and providing significantly improved convenience, security and accessibility to all our beneficiaries.

Our financial strength (inaudible) that enables us to arrange finances for the significant amount of money required to pre-fund social grants in any or all of the provinces we see the requirement of the tender. That was number four.

Number five, our successful track record to bank (inaudible). 1.5 million beneficiaries will now use the UEPS guide to transact at merchant [stalls] and apply for financial services.

Six, our commitment to the principle of black economic environment underscored by a demonstrable high level of employment equity, financial participation by local black partners, preparation for human policies and community assessment programs.

In the meantime, it is business as usual, and we continue to provide the South African government with services [leveled] at the highest standard. Our trading results reflect the efficient manner in which these operations are run and administrated, and our technology has been fundamental in improving efficiencies as well as margins.

Now to focus on our international expansion, our international business development plan. There were several exciting developments during the 2007 fiscal year. Our ventures in the media in Botswana have settled well and are progressing in line with our expectations in terms of profitability. We commissioned a switch in Algeria, and already received an order for the first 50,000 cards from our main partner, [Navan] Bank.

A key milestone achieved during the fourth quarter of fiscal 2007 was the approval that (inaudible) Nigeria received from the Central Bank of Nigeria to conduct a multilateral clearing and filament system that will allow other financial institutions to participate in the switch and to utilize the UEPS smart card as a payment in and for Nigeria. This license was fundamental as it places the UEPS as an approved payment system, which has been evaluated and approved by the Central Bank of Nigeria.

You may also recall that (inaudible) Nigeria, as a member of the CHAMS Consortium, tended to provide the Nigerian government with a multi-purpose smart card. The multi-purpose card can comprise, or comprises still today a national identity authentication verification system, a government payments (inaudible) system, and an affordable banking solution. I am pleased to state that we have received notification from our partner that the Nigerian government has awarded the above tender jointly to the two shortlisted bidders, being the CHAMS and the [ARIS] Consortia. Negotiations are currently underway to define the responsibilities of each of the consortia which will ultimately determine the role that (inaudible) through (inaudible) Nigeria will playing in this tender.

Our sales and marketing team has continued to expand the universe of potential UEPS implementations, and we are currently engaged in discussions with at least 20 potential customers or partners around the world. We have provided a lot of detailed information regarding our business leads in the past, but I believe that in the interests of protecting our competitive edge and guiding expectations, we should revise this strategy and focus on the broader opportunity. The sale cycles in any new territory all look very difficult to predict. Generally spend several months, in some cases years, as a myriad of factors need to be considered, including the corporate regulatory environment, central bank requirement and approval, tax regime, compilation of business plans and the like.

Our strategic role is to enter and introduce a UEPS technology in at least four new territories, of any size, during a 12 month period. Since I first announced this target at our last (inaudible) call, we have already achieved great success when we were rewarded the national switch and smart card payment tender by the Central Bank of Ghana in June of 2007. The tender was issued (inaudible) to the vision of the Central Bank of Ghana to provide the Ghanaian financial services industry access to a (inaudible) and state of the art technology core platform that will allow for the switching of all existing payment instruments, and introduce a new biometrically protected smart card designed to deliver all the core financial services to the majority of Ghanaian citizens.

We believe this to be the first time ever that the national electronic payment system will allow so many different technologies to interoperate with each other for the benefit of all its stakeholders, but any sure contract value for the delivery, installation, and customization of the switch in new UEPS hardware and software, is estimated at approximately $20 million during the next 12 months. The solution will be implanted over the first three quarters of fiscal 2008, and is designed to achieve interoperability between all existing ATMs, point of sale, and teleterminals owned by individual banks. These banks will deploy new ATMs and point of sale devices, which will all be and have to be UEPS compliant, and which will be connected directly to the new processing system.

The system will also incorporate a card risk management applet, as well as the ability to provide biometric protection to PIN-based applications as an additional but independent verification process. Ghana, as a result, will also be the first country to implement a new mobile-based UEPS application which will provide a full range of transaction functions such as cash withdrawals, as in our new human ATM system, payments for goods and services, and access to affordable financial services.

By the way, our new ATM system refers to a system we have created that allows a person in possession of a UEPS-activated cell phone to dispense cash to another person with a similar phone, therefore, doing away with ATMs through the wall and, of course, thereafter, and to use the cash that floats around the economy to simply be recycled between, let's call them, the low -- lower earning customers. We believe this is a great opportunity to start drying up the cash requirement in Nigeria, and to actually allow people to start transacting with each other in a completely offline manner.

We expect to generate recurring revenues in Ghana from ongoing license fees from each of the 23 Ghanaian banks based on the number of smart cards they will issue, as well as revenues from hardware and software maintenance and ongoing sales of cards, point of sale terminals, ATMs, and registering stations. Further revenue strength will arise out of transaction fees from our new mobile applications and from a range of services, which we will offer to all participants.

Finally, I would like to point out the significant progress that we have made over the last year in terms of strengthening our management team. We have made several appointments at the senior management level, especially in sales and marketing division, to ensure that we have sufficient depth to pursue and realize on the myriad of opportunities that we are presented with on an ongoing basis. The acquisition of Prism has in some areas strengthened our core technical competency to ensure that our technology remains at the cutting edge. We are well positioned to continue to grow our -- to continue our growth profile over the next -- over the near to long-term, specifically in terms of our earnings target, as Herman will provide later on. We have now and continue to build our capacity to focus on international growth and expansion, where it is clear that our systems are reaching recognition and acceptance, and are being perceived as much better alternatives to existing payment technologies.

Thank you very much for your attention. I'd like to hand over to Herman. Herman, over to you.

Thank you, Serge. Good morning and good afternoon to all our investors around the world. I will discuss the key trends of the fourth quarter fiscal 2007 compared to the fourth quarter fiscal 2006, along with the key trends between the third and fourth quarter in fiscal 2007. Where applicable, I will discuss key trends between the full year results for fiscal 2007 and fiscal 2006.

Our results for the fourth 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 year ended June 30, 2007 incorporate the results of Prism for the full year and the result of the remaining 25.1% of EasyPay from October 1, 2006. In order to provide you with relative information regarding the financial impact of those acquisitions, we have provided you with certain non-GAAP measures in our press release, including the Net 1 financial results on a standalone basis, excluding Prism, in attachment D of the press release, and the measurement of fundamental net income and fundamental earnings per share to demonstrate the impact of the Prism purchase account and stock compensation charges on the Group results.

We have also updated the frequently asked questions section in our press release to provide further clarity on the questions we are asked most often by investors and analysts. Again, for clarification purposes, I would like to mention that my following discussion will be based on our results in South African rand, as this provides the best indicator of the Group's actual operational performance, and this is a non-GAAP disclosure. In order to review our results in terms of US dollars and GAAP, please review our annual filing on Form 10K as well as our press release filed yesterday.

For the fourth quarter, our average rand-dollar exchange rate was ZAR7.12 to the dollar compared to ZAR6.44 for the fourth quarter of fiscal 2006, and fairly flat when compared to the ZAR7.21 to the dollar for the previous quarter. I will discuss the key trends of the fourth quarter fiscal 2007 compared to the fourth quarter fiscal 2006 now, along with the trends between the third and fourth quarters, as I mentioned before, and the full year.

When we analyze the differences between the fourth quarter of fiscal 2007 and the fourth quarter fiscal 2006, it is important to remember that the present trading results are included in the 2007 fourth quarter numbers and not in the 2006 numbers. On this basis, revenue for the fourth quarter was ZAR428.5 million, up 38% year-over-year. Our gross margins for the fourth quarter of 2007 were 73% compared to 76% for Q4 2006 and 77% for Q3 of fiscal 2007. However, in our business, gross margin is not the best indicators of the Group's profitability due to our [buyers] product offering. We focus on operating income, which increased by 18% to [ZAR134.7 million] between Q4 of fiscal 2006 and Q4 of fiscal 2007.

The operating overall margin for Q4 of 2007 decreased to 31% from 38% in Q4 2006, mainly as a result of the inclusion of Prism's activities which has a much lower profit margin, especially in the core hardware and SIM sales segment, as well as the inclusion of intangible amortization as a result of the Prism acquisition. If we exclude the effects of the intangible amortization, the operating margin for Q4 2007 was 43%. Sequentially, the operating margin declined from the 50% in Q3 as a result of the impact the contract variation settlement payment that we received from SASSA during the third quarter.

On a full year basis the operating margin declined by only 3% from 46% for fiscal 2006 to 43% for fiscal 2007 despite the inclusion of the lower margin businesses of Prism. Again, if we exclude the intangible amortization and the result of the acquisition are excluded, the operating margins were the same at 46% for both years, which implies an improved operating margin from our traditional businesses and is detailed in attachment B of our earnings press release.

Let's now analyze the business along the more detailed lines using our reported statement. The operations of Prism have been allocated to two of our existing reportable segments, namely, transaction based activity on the one hand and hardware-software related technology sales on the other. Our transaction based activity segment had revenues of ZAR225.1 million for the fourth quarter, which is an increase of 50% year-over-year on a rand basis. In addition, our transaction based activity segment operating income of ZAR128 million is 20% higher than that during the fourth quarter of fiscal 2006. Our operating margin in this segment has decreased when compared to the previous quarter of fiscal 2007, mainly as a result of the establishment cost we've incurred to prepare for the significant anticipated increase in the beneficiary base in the northwest province as SASSA transfers beneficiaries from the post office to us.

Other factors that had an effect on the operating margin were the costs incurred as a result of the SASSA tender preparation process. We expect the margins in this segment to stabilize between 55% and 60% in the medium term depending on the transfer rate of beneficiaries to us. These increases in revenues and operating income were due primarily to the contributed option as well of our [merchant] acquiring system in the provinces where we distribute (inaudible), increased transacting ability of participating retail for the store devices in these provinces, higher volumes and fee from all of our major provisional contact, and including the transaction fees generated by EasyPay as a result of the Prism acquisition.

The total number of payments posted to beneficiaries increased some 10.96 million for the fourth quarter fiscal 2006, to 11.43 million, giving the fourth quarter fiscal 2007, which is an increase of 4%.

Sequentially, the total number of payments versus the beneficiaries was comparable with the 11.41 million for the first quarter of fiscal 2007. On an annual basis, the number of beneficiary payments increased by 7%. The largest sequential increase from Q3 to Q4 was in the northwest province. The government has commenced with the transfer of beneficiaries to our (inaudible) from the South African Post Office.

During this last quarter, we also experienced a limited public sector strike in South Africa, which we believe had an impact on new legislations posted by government.

We also experienced seasonality in our transaction-based activities segment, as 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.

Our first quarter results is duly larger, as a result of increased activities in January. The activation of the payment part of any month also depends on whether the first calendar day of a month is a weekday or a Saturday, Sunday or public holiday.

During the fourth quarter fiscal 2007, our merchant acquiring system continued its impressive performance, as we posted a total of ZAR1.78 billion in transactions through our merchant acquiring network, compared to ZAR1.2 billion during the fourth quarter of fiscal 2006, and ZAR1.6 billion during the first quarter of fiscal 2007. All that [may] complete pay cycle basis.

The productivity of our core terminal base of 4,257 terminals continues to improve, with an average of 810 transactions posted per terminal during the completed pay cycles of the fourth quarter of fiscal 2007, compared to 603 (inaudible) transactions per terminal during the fourth quarter of fiscal 2006, and 807 during the first quarter of fiscal 2007. This increased throughput from the comparable period in fiscal 2006 demonstrates the continued rapid acceptance rate of our card holders as they become familiar with, and accustomed to, the convenience of firstly, the first stages of our merchant acquiring initiatives and secondly, to receive and send a grant at any time of the month.

The increase in the number of terminals in shops is primarily as a result of additional terminals deployed in the northwest province to accommodate the anticipated additional beneficiary transfers from the South African Post Office to us, over the next two quarters.

During the three months ended June 30, 2007, EasyPay, that we got as a result of the Prism acquisition, posted 114.2 million transactions, with an approximate value of ZAR25.1 billion, compared with 108.8 million transactions posted, with an approximate value of ZAR34.3 billion during the three months ended March 31, 2007.

The average fee per transaction during the three months ended June 30, 2007 and March 31, 2007 was approximately ZAR0.2. The fees related to the three months ended June 30, 2006 are not included in our results for the three months ended June 30, 2006, as we only acquired EasyPay effectively on July 3, 2006. We do not expect a significant fluctuation in rand and the average fee per transaction during the first quarter of fiscal 2008.

EasyPay's operating margin, excluding the effect of intangibles amortization was 32% for Q4 2007 compared to 42% for Q3, and 52% for Q2. EasyPay's margins are affected by the seasonal nature of this business.

Our smart card account segments have revenues of ZAR62.9 million for the fourth quarter, which is an increase of 4% over the year. The total number of active smart card accounts increased by 4% from 3.7 million during the fourth quarter of fiscal 2006, to 3.8 million during the fourth quarter of fiscal 2007. Sequentially, there was marginal growth in active smart card accounts from Q3 of fiscal 2007 to Q4 of fiscal 2007, and fewer registrations were posted by the South African government, probably caused in parts by the strike I mentioned earlier.

On an annual basis, our revenues of card holders increased by 7% from 3.65 million card holders to 3.81 million card holders.

Operating margin of this segment remains static, at around 45.5%.

Our financial services business has revenues of ZAR18.5 million for the three months ended June 30, 2007, which is a decrease of 22% compared to Q4 fiscal 2006, and a sequential decrease of 10% compared to Q3. Our traditional lending business continues to remain static as part of our strategic decision not to grow this segment.

Revenues from [UBS] based lending decreased during the three months ended June 30, 2007, compared with the three months ended June 30, 2006, primarily due to the lower number of loans granted during the three months ended June 30, 2007, when compared to the fourth quarter of 2006. In addition, on average, the rate of interest charged on these [UBS] based loans was lower during Q4, June 30, 2007, compared with the three months ended June 30, 2006.

The final phase of the National Credit Act in South Africa, or the NCA, became effective on June 1, 2007. The NCA has impacted on our traditional and [UBS] based lending activities in South Africa. In compliance with the provisions of the NCA, we are permitted to charge an initiation fee and a service fee on all traditional and [UBS] based lending activities, as well as really lower interest rates on a monthly basis. Our management has decided, effective June 1, 2007 to significantly reduce the interest rate charged on all new [UBS] based lending activities. And we now charge a nominal interest rate, together with a service fee, to comply with the provisions of the NCA.

We are required, effective June 1, 2007, to review the interest charged on all new traditional lending activities and introduce a fee for initiation and servicing of all the new lines.

The increase in fees generated from new traditional lending activities approximated interest that we historically generated from these activities. We have included, and will continue to include in the foreseeable future, initiation and service fees in this financial services statement.

The final operating segment is our (inaudible) and related technology cells segment. This segment traditionally sees revenues that occur on an irregular, one-off basis, and it can be difficult to predict sales from year to year. This segment includes the sales of UBS related (inaudible) in (inaudible) as well as the Prism cells subscribed by identity modules, SIM cards, the (inaudible) services and SIM card licenses.

The segment has revenues of ZAR91.9 million for Q4 fiscal 2007, an increase of 196% year-on-year, mainly as a result of the [fusion] of Prism's activities.

Overall, the operating margin of this segment declined, with 69% for Q4 for fiscal 2006 to 27% in Q4 of fiscal 2007. In order to understand the main drivers behind this significant decline in margins, we need to separate the traditional Net 1 business from the Prism contribution to this segment. The traditional Net 1 business, on a stand-alone basis, reported operating margins of 64% during Q4 2007. The Prism results on a stand-alone basis resulted in an operating margin of 19% during the three months ended June 30, 2007. The lower margin was mainly as a result of the allocation of the amortization of Prism's intangible assets to this segment. Excluding these (inaudible) amortization charges, overall operating margins for this segment improved from 19% to 28% for Q4 fiscal 2007. Current operating margins in this segment continue to be negatively impacted by some manufacturing activities, and we expect this trend to continue into the foreseeable future.

Our respective tax rates for the three months ended June 30, 2007 was 33.13% compared to 38.2% over three months ended June 30, 2006, and for Q3 of fiscal 2007. The change in our effective tax rate was primarily due to foreign tax credits determined during Q4 of fiscal 2007, a recently elected research and development allowance in South Africa, which was made effective from November 1, 2006, and fewer non-deductible expenses during Q4 of fiscal 2007, compared to the three months ended June 30, 2006.

We have received a number of queries relating to the announcement made by the South African Minister of Finance regarding the proposed changes to the secondary taxation on companies in South Africa, or [ACC]. We have illustrated our interpretation of the potential effects that a reduction in the [ACC] rates will have on our results, as well as the effect of the abolishment of [ACC] in question 21 of the frequently asked questions section, or attachment D, in our (inaudible) press release.

Our fourth quarter net income was ZAR124.8 million which is an increase of 25% year-over-year. Net earnings per share increased by 15% (inaudible) from $0.27 in Q4 2006 and $0.25 in Q4 2007. On constant currency terms net earnings per share increased by 26% compared with Q4 2006.

Fundamental earnings per share for Q4 2007 was $0.53 compared to $0.27 for Q4 2006, an increase of 22%. On a constant currency basis fundamental earnings per share for Q4 2007 increased by 35% compared to Q4 2006.

Turing to our balance sheet, as of June 30, 2007 we had $171.7 million cash and cash equivalent, and our cash levels are almost restored to the levels before the present acquisition which resulted in an outflow of approximately ZAR700 million or $95.2 million during the first few days of fiscal 2007. The business remains very cash generative, and I remain comfortable that we have sufficient liquidity between our cash and cash equivalent and our current (inaudible) facility to fund our working capital requirement for the next three quarters.

The July 2007 (inaudible) was opened in the last four days of June 2006, which again has had an impact on our pre-funded social welfare grants receivable balance. The balance is higher as of June 30, 2007 compared with June 30, 2006, due to the increase in the number of beneficiaries loading their July 2007 grants at merchant locations in June 2007 compared with a load made by beneficiaries in June 2006 for the July 2006 (inaudible).

When I [assess] the actual quantum of our cash reserves I include this balance sheet line item in my calculations as it is a highly liquid, very short term, government receivable probably best described as a near cash equivalent. On this basis I want to point out that our cash conversion ratios calculated as net cash provided by operating activities, excluding the effects of pre-funding, divided by net income amounted to 118% or a cash conversion ratio of 1.18 for first quarter 2007. Our accounts receivable inventory property, plant and equipment, accounts payable and other payable balances as of June 30, 2007 are higher than June 30, 2006 largely due to the acquisition of Prism and the remaining (inaudible).

The acquisition of Prism and the remaining 25.9% of EasyPay has resulted in an increase in goodwill in our balance sheet of $71.9 million and a net increase in intangible assets, net of amortization, of $26 million.

The movement in our treasury stock balance has (inaudible) for two reasons; the first reason is that in June 2007 we acquired 40,100 shares of our common stock for approximately $1 million and the second reason is that in May 2007 (inaudible) compliance with our stock plan, stock options were exercised by [employing Indian company] stock as consideration. During the quarter we sold our 43% interest in Permit Group 2 to the (inaudible) shareholder as part of our black economic empowerment development program. We received the total of ZAR33 million for approximately $4.5 million as payment for the shares and the settlement of the loan account. Overall I am very pleased with the quality of earnings and the very healthy solvency and liquidity of the Group as reflected by our balance sheet.

Our return on equity exceeds 50%. The return on average total assets is 20% and the net asset value per share is now almost $5 per share. Based on the assumption that our current business activities and initiatives will continue as usual, we anticipate our fundamental earnings per share growth rate to exceed 20% on a constant currency base of (inaudible). We plan to achieve this growth rate with a combination of beneficiary growth in our (inaudible) payment business, improve efficiencies across the Group, and a slightly lower anticipated tax rate, the contribution of the [Gormer] contract, and contributions from various other initiatives including the wage payment implementation and other international endeavors.

We fully understand the need to deliver quality earnings on an ongoing (inaudible) but I would like to reiterate what Serge has said, that we are primarily focused on implementing our strategy which will result in the creation of significant long-term value for all our stakeholders.

I would like to thank our loyal shareholders, who have bought into our vision, for their continued support.

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

Thank you very much, sir. (OPERATOR INSTRUCTIONS). Our first question comes from [Drew Chopra] of Morgan Stanley.

Morning, gentlemen.

Hi, Dhruv.

I had a couple of quick questions; first relating to sort of the beneficiary growth, that was slower -- what is, slower than what I was expecting -- what is holding up the northwest province deployment?

Dhruv, yes, there're a few factors that play a role in the transfer that we discussed at the last earnings call of those beneficiaries in the northwest from the (inaudible) to ourselves. I think a major factor that played a role in the last quarter, and something that obviously delayed the transfer process, was the almost one month long strike that we experienced here in the public sector. That certainly played a role. There were also certain issues that had to be resolved between SASSA and the Post Office from an IT point of view, and the transfer of the beneficiary files across to us. So we are running behind schedule, we are well aware of that, and we're obviously in constant communication with SASSA regarding how we can speed up the process and obviously what the implications for us is on a financial basis as a result of the delay. But I am pleased to say that certainly the process has been significantly improved over the last two months since the end of the financial year, and in July and August more than 100,000 beneficiaries have already been transferred across to us. That, of course, has a few implications on the financial results. I think the first thing that you would have seen was the decrease in the operating margin in a transaction based activity segment, and that's because we include quite a lot of expenses in the last three months of fiscal 2007 to gear up for the, approximately I think it's about 280,000 beneficiaries that we anticipate, new ones.

So as a result of that we obviously had to buy that amount of (inaudible), which we have to expense obviously over a much shorter period than normal. We also had to open up quite a few new offices and employ new staff members in the northwest, and we obviously also put up quite a number of new terminals into the merchant stores in that province as you will see from the terminal statistics.

So that's really the story, we're obviously keeping a close eye on it, but we hope to give you good news by the end of Q1 of 2008.

Okay, great. Is it possible to try and quantify what the impacts were of these costs to roll out this -- or to ready yourselves for the province?

That's quite a difficult exercise because we don't keep those as separate cost data, but I would estimate that in the last quarter we probably spent, just on the (code) as well as the leasehold improvement and the take up costs that we had to incur, that's probably around ZAR83 million that we include without really receiving any additional revenue as a result of it.

Okay, great. And then just to recap on your guidance, the 20% constant currency earnings growth. Is that -- that does take into account the 20 million hardware/software sale to Ghana, what about wage payment, VTU, northwest, lower tax, is that all included?

Well, that's our best estimate right now, is looking at the budgets that we (anticipate) for the Group, that includes contributions across the board from all the activities. We're happy right now to predict an earnings per share growth rate that will be 20% or more. Obviously on the principle that -- and I just want to make that clear that business will continue as it is right now, we have excellent visibility obviously at least for the next three quarters of fiscal 2008 until the award of the (inaudible) tender, and at that point in time, if anything materially changes, and that can be as a result obviously of the new tender conditions that may include certain pre-funding requirements, there could be some changes obviously around the timing of the pay cycles and how the service is delivered, but when we know those answers we will obviously recalculate and we will have a specific call to update you on our information.

Okay, great. And then just lastly on this SASSA tender itself, is there any indications that you're getting from them in terms of timing or direction? When do we get to that cut-off point when they're going to have to extend the contract?

Dhruv, it's Serge here. As you are well aware, the basic requirement of the tender is that we cannot enter into any communication with SASSA or any SASSA member for any reason whatsoever during the adjudication process. That's rule number one. So, in fact, I know that some of our investors have entered into discussion with SASSA on a number of times, which candidly has proved to be rather embarrassing rather than anything else. So we would like to, we are trying to keep to the word of the tender simply because a tender of this nature can become legally difficult. And we simply do not want to be disqualified by asking questions which candidly we probably already know the answer to. So that's point number one.

In terms of visibility, different people have different views. And obviously SASSA have not come out with any written or verbal update as to where they are. We still believe, internal to the company, that it is paramount that the tender is finalized, awarded by the end of October of this year. That's what we believe. We could be, of course, completely and utterly wrong. And the reason why we believe that is because we know that there is a fairly serious election process taking place in December with the [ANC] and therefore we actually believe that this tender as a national initiative is certainly in focus with the ANC, as well as with the current government, not only with the ANC party. So we believe that it's something that at the latest would be awarded by the end of December.

If that was not the case, then we believe that SASSA will come back and probably grant extensions to everybody, very possibly for another year. In other words another 12 months, which means that they would start this process all over again, because none of the tenders would be valid past April 1, 2008. So if they miss that date and do extensions, that would probably imply that they would have to go through a secondary tender process or allow the tenderers to readjust their tenders vis-a-vis pricing and a number of things including other parameters.

So because of the difficulty of doing that, I strongly believe, but that's my own personal view, that it will be adjudicated before the end of October of this year. That's what I believe, but as I say, I could be completely wrong.

Okay, great. Thank you.

Thanks, Dhruv.

Our next question comes from Dave Koning of Baird. Please go ahead.

Yes, good morning, guys. Nice results.

Thank you.

Yes, first of all, and just to clarify a couple of Dhruv's questions, when you talk about, late in the press release, beneficiary growth somewhere around 6% on kind of an ongoing basis, would that be in addition to the northwest beneficiary adds that I think you've expected to be somewhere around 300,000 this year?

That's right. Yes, Dave, I think just to clear up any uncertainty that 6% rate is the rate that we expect out of the government publications and that would be the expected national beneficiary growth rate. So really the excess of new registrations over deaths and/or people who are removed from the system.

Internally, of course, the transfer of the northwest beneficiaries to us is merely a transfer of existing beneficiaries that today get paid by the post office to ourselves, and that's really excluded from that organic 6% growth rate number.

Okay, great. And then secondly you mentioned that the margin was in transaction was hurt a little bit by the northwest costs this quarter, and it came out for the full segment including Prism I think was around 50%. And you're saying longer term you'd expect that full transaction margin to be more like 55% to 60%?

Yes. If you look at the last three quarters our margins in transaction-based activities was close to the 60% (inaudible). Of course in Q3 we had the contract settlement [relation] payment which is a bit of an anomaly when you calculate margin or operating margins in that specific quarter. But again if you compare what we did last year to this year as well as the first three quarters, and it will be a function of exactly when those beneficiaries are transferred to us and when we get paid for them, those margins in the transaction-based segment should go back to be between 55% and 60%.

Okay, great. And in terms of Ghana this year you mentioned $20 million or so of [revs] over the first few quarters. What sort of margins, just if you could give us a little update on that, what sort of margins do you expect on that revenue this year? And then maybe on an ongoing basis what type of more sustainable recurring revenue in margins do you expect out of Ghana?

Well, Ghana will, of the $20 million dollars, probably the easiest way to explain that is to split it between the two major components. So one half (inaudible) being the hardware component where they will buy from us the start-up computer equipment, terminals and cards on the one hand. On the other hand, there is the software UEPS [core] engine purchase along with the customization of the software, training and implementation that goes with that. So they're obviously two very different margin aspects to the (inaudible) that would apply to the software (inaudible) a much higher margin business, simply because most of our expenses have been expensed over the years as we've developed the UEPS core. So you've definitely got two things. But I think if you wanted to give a blended operating margin [rate] it's probably between 50% and 60%.

Okay, great. And what do you expect ongoing revenue to be out of Ghana?

The ongoing revenues of Ghana, Serge if you want to --

Yes. Perhaps to give you a bit of an idea of what we are expecting in Ghana. In Ghana, because through the central bank of Ghana we have managed to sign up really indirectly 23 banks, which is all of the banks of Ghana, who according to the central bank of Ghana have to implement the UEPS technology as the national payment system. It's not a question of choice, it's a question that now [the] UEPS has become the national payment system for Ghana. So all 23 banks are currently positioning themselves in terms of obviously making purchases for cards, and obviously they're on terminals if they want to run their own merchant-acquiring network, as well as ATMs, all of which, of course, will have to be UEPS compliant, which means at this point all of which will be purchased through us.

Now obviously that will give us some ongoing revenues with ID card sales, terminal sales, ATMs and the maintenance, which is associated with all of this. But more importantly, they also pay royalties on the number of cards which they themselves issue. Now the royalties, for example, start at around $75,000 per annum in a particular band, which is not a lot of cards. And we would expect all 23 banks to have at least at least a minimum license in year one, maybe 23 times $75,000.

With a little bit of luck some of the banks, of course, will start growing at a faster rate and probably start paying license fees in excess of $200,000 or $250,000 if the central bank of Nigeria has its way. They've already indicated that they're aiming at least 3 million cards by I believe it is April or May of next year. So the 3 million cards distributed across 22 would certainly double already the license fee that we would expect to have (inaudible).

Further to that the way that Brenda has negotiated the telecommunication part, which is really the first implementation of our cell phone UEPS offering, is that that falls outside of the contract vis-a-vis transaction fees and we believe then we will be able to get in fact a transaction-based fee rather than a royalty fee. And at this point in time we do not know how many UEPS customers will be cell phone compared to how many of them will be card based. And that will give us again an indication of what sort of transaction fees we could make out of the cell phone rather than cards.

We believe that in Ghana there may be more people using cell phones in the medium to long term than in fact cards, which would be good for us because the transaction fee based model that Brenda has put into place is obviously more lucrative than, let's call it, zero to 50,000 cards, 50,000 to 100,000 cards top of annual royalties. So that's another income stream that we are at the moment playing with and calculating, and then of course, finally there are other income streams whereby each bank in Ghana has the right to negotiate directly with Net 1, vis-a-vis any other service which they would believe or believe that Net 1 can assist them with. Now that could be marketing, it could be selling on their behalf, or in fact it could be doing JVs with us, for us to actually allow them to understand UEPS a lot faster into financial services for the un-banked market. Obviously, we will have to do that because then we also then get very possibly a piece of the equity of the specific business.

So there are two or three certainly absolute recurring revenue streams that will come out of Ghana, hardware based, software based, royalty based, transaction based and very possibly business based. We're busy working at the moment on the worse case and the best case scenarios.

Great, thanks for the detail.

I think we've got time for one more.

Thank you very much, sir. Our final question then comes from [Shamere] Khan of JP Morgan.

Hi, good afternoon. Just to circle back to the management guidance on earnings, to look at it from a different perspective, if we look at the earn out numbers that you've put down for yourselves in terms of your share options, you say 20% compound growth in 2011 at an earnings number of ZAR20.14, which would then imply that the FY08 numbers about ZAR11.65, is my thinking correct in that?

Obviously, (inaudible) what (inaudible) in terms of the stock option allocation, but I think you've got to support what the remuneration committee of Net 1 have set as our individual targets from what we believe we should provide as formal guidance to the Group. Unfortunately those two things are not linked because they may be much more stringent conditions that apply to us than those that we would necessary want to apply to ourselves, Shamere, but I think generally the 20% numbers would (inaudible), we also have the obviously stock options that (inaudible) executives of Net 1 and then there are those that get granted to the senior management members and you'll notice that there is a difference as well between the hurdle rate that has been set for the directors as opposed to the senior executives.

So that I think in a nutshell, what I can say about that, we believe that the guidance we've given you of at least a 20% constant currency growth rate is the most appropriate at this point in time.

Okay, so we should rather view this as let's say as (inaudible).

That's right.

If anything.

I think you've been quite good in reading the other one and assuming that we have no intention of earning our shares or our bonuses, obviously we would do 20%.

Alright.

So I think you have put two and two together and I think you've got to the right number.

You've got to take a view on how much we actually want to earn our keep.

And in terms of the wage payment system, I mean things will, sort of being fishy numbers, but just remind us, [the new] transaction fee was about ZAR3 per month per card, was that sort of in the ballpark?

I think it was a bit higher than that, I think it was ZAR3.50.

Well, there are two different kinds of fees that you've got to factor in going forward, one is the fee that we will charge [Greenrod] Bank as a result of outperforming all of the back end processing, and that is ZAR3 per card per month. The other fees which are really the direct relational fees, as these cards are utilized, in other words they will be fees payable by employers, when funds are loaded to the cards, there are fees that will be payable by the cardholders themselves. As an example, when the (inaudible) cash [is drawn], there will be fees when they spend at merchants, that are obviously paid by the merchants themselves, those fees are all paid into the retail division of [Greenrod] Bank, and we are then paid an equal share really of whatever profitability is realized through the usage of the card over a period of time.

Okay, and then just lastly, the [Iris] consortium in Nigeria, obviously they had another technology partner, I'm not sure if you had a look at the technology solution, but is there anything there in terms of that technology solution that worries you in terms of a potential rival for Nigeria and then possibly Africa?

Yes, obviously what worries us is that they're still there. I would have been much happier if they had disappeared completely to be quite honest. At the end of the day they are using a Malaysian based technology which was redesigned many, many years back from an e-passport point of view, and as far as I'm aware the Malaysian company that were doing the e-passport are actually moving away from that technology themselves. So I think, which is going to weaken their case a little bit in Nigeria, but more importantly the reason why we're still in the game is because the most, I think, important part of the Nigerians, or the Government of Nigeria's, requirement was that they wanted a system that they (inaudible) payment technology that could serve the un-banked population of Nigeria. And one thing I know for certain is that the Malaysian e-passport doesn't do that, considering that there is only one technology in the world that does that, and that's ours.

So from that point of view we are very, very happy, but I think the [bond fight] between CHAMS and [Iris] is going to be about whose e-passport technology do they use, but I've got a feeling that from the payment point of view, that (inaudible) they might have already made the decision within themselves that there is only one they can utilize and that's ours. So we still feel pretty confident that once they've sorted out between the two of them we're going to (inaudible) from an economics point of view, I think we've got a much better than average chance of actually getting the payment side in totality.

Alright, so no real concern in terms of technology rival going forward?

Absolutely not, and in fact today you saw what happened in Ghana, we had everybody tendering against us, from IBM, to Visa, to MasterCard, to all the big players, that doesn't even come second.

You know, so from a technology point of view to be quite honest, I have absolutely no worries in underdeveloped markets, that our technologies outweigh everybody else. (inaudible) even with e-passport today, the latest tougher thing that we presented in a couple of other places which I can't mention at this point in time are making a huge impact, simply because nobody has an integrated solution. Everybody plays little parts in different things, transportation, you know, e-passports, e-voucher, you know they put an e- in front of everything. We simply have a technology that incorporates everything, but works and is actually proven and is secure and works in developing economies in rural areas, so I'm very concerned that right now the only competition we've got is legacy, and I think the legacy systems are starting to take a beating because people are starting to realize that it's not worthwhile buying 20 and 30 year old systems, but they should rather leapfrog and spend their money on something that is the way of the future.

Alright, thank you gentlemen.

Thank you very much.

Gentlemen, we do have one further question in the queue. Would you like to take it or would you like to make some closing comments?

Let's take it.

Okay, our final question comes from Peter [Bolivar] of Matrix. Please go ahead, sir.

Hey Serge, hey Herman, congratulations on another fine quarter.

Thank you, we didn't know what happened to you.

Pardon me?

We said, we didn't know what had happened to you because there was no question from you.

If you could just talk a little bit about the technology criteria in the SASSA tender, it appears that the tender contemplates a grant administration system ,and do any of the -- other folks have it that are bidding for accounts for the national tender or for the provinces?

I think again Peter you're -- I know you've been talking to some of the people at SASSA and you've been reading the tenders, so you obviously know what they want. There is absolutely no doubt that in order for the South African Government to distribute pensions, it was basically grants, you have to have a system to manage, first and foremost, as to who should be granted a particular welfare pension and that's what they call the grant administration system. Now there is also no doubt that we are the only company in South Africa that has actually tendered for a grant administration system, and have a fully fledged grant administration system that has been proved to eliminate fraud and (inaudible) South African Government in excess of ZAR1.7 billion to ZAR2 billion per annum. So, if that is taken into consideration, [then it's] quite obvious as well is that payment technology that flows out of that system, it is integrating the [grant] administration system. So, if they had to go with us, and this is just, of course, between -- again, our way of thinking -- if they had to go with us they would have a fully integrated solution that would provide them with a grant administration system, as well as the grant distribution system, as well as the grant payment system. And that will become ubiquitous across the entire South Africa and all of the provinces. That's why we think that our solution, from a technology point of view, is far ahead of anyone else because no one out there [has all three]. Most people are only tendering for one piece, and none of their systems are compatible with each other.

But if you look as well at the cost saving in having one system which is integrated rather than three independent tenders, and each tender might be into the billions, there is also no doubt that it would make sense to actually award us the total tender, but sometimes what makes sense is not always what happens.

Right, thanks.

Thank you, Peter.

Gentlemen, we have no further questions. Would you like to make some closing comments?

Yes, well on our side once again we would like to -- I know it's still the holidays in the United States or just finished holidays, so I would really like to say thank you very, very much to our investors, that they've looked after us and looked after our stock for so long.

And at the same time to really also thank the analysts that are putting a huge amount of work and effort in trying to understand our company better and better on a month-to-month basis. On our side, we are certainly trying our best to convey as much information as possible to try to explain our business model in a much clearer fashion.

And we are certainly doing a lot of work on our side as well to start appointing certain individuals that are going to take over in the function of IR, and therefore are going to be able to give far better, we believe, [well at least more continuous] bursts of information between quarters which is something that a lot of our investors, I think, have been asking for, and I think we've come to realization that perhaps it's actually the correct way to actually do it, not to leave them in a vacuum for three months at a time.

So, hopefully you will see a few things happening again in the next couple of weeks, not only on the business side, but I think on the management side and the structuring of the company side. And I would like to take the opportunity to thank all of you very, very much, and to wish you the best next financial year. We know we're going to have a good one.

Thank you very much. On behalf of Net 1, that concludes this afternoon's conference. Thank you for joining us. You may now disconnect your lines.