Lesaka Technologies Inc (LSAK) 2008 Q1 法說會逐字稿

Good morning to all our investors in the U.S. Good afternoon to our investors in Europe and South Africa. And a special mention and good wishes to our Hindu audience, because we believe today it is Diwali after all, so good luck to all of you.

Thank you for joining us for our first quarter of fiscal 2008. With me today is Herman Kotze, CFO. Both our press releases and our 10-Q are available on our website at www.net1ueps.com. That is 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 release regarding the risks and uncertainties associated with forward-looking statements. In addition, during this call we will be using certain non-GAAP financial measures as defined under the U.S. securities laws. We are required by these rules -- we have provided a reconciliation of these non-GAAP measures to the most directly comparable GAAP measures as exhibits in the press release dated yesterday.

As mentioned on our previous call, it has become a apparent to Herman and me that our previous practice of presenting our results in U.S. dollars, which is GAAP, and South African rand, 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 in results in South African rand, which is a non-GAAP measure. We analyze our results of operations in our latest 10-Q and in our press release in South African rand to assist investors in understanding the changes in underlying trends of our business.

The Company's results is significantly affected by currency fluctuation between the U.S. dollar and the South African rand, 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 our annual report on Form 10-K or 10-Q and press release. And we advise our investors and analystd to review the Company's results in terms of U.S. GAAP.

During the first quarter of fiscal 2008 the South African rand stabilized against the U.S. dollar, and thus our results were not significantly impacted by changes in the U.S. dollar/South African rand exchange rate. However, as most of you are probably aware, the exchange rate has again become volatile and we expect this volatility to affect our second quarter results.

In terms of our first quarter fiscal 2008 results, I am again very pleased with the Group's performance. In analyzing our results we will provide additional non-GAAP measurements, mainly fundamental net income and fundamental earnings per share that eliminate, among other adjustments, the significant non-cash accounting increase required by GAAP for intangible assets amortization and stock-based compensation charges.

On this basis, we recorded an increase in fundamental net income of 21% from ZAR115.3 million for the three months ended September 30, 2006 to ZAR130 million for the three months ended September 30, 2007, and a corresponding increase in fundamental earnings per share of 21% to ZAR2.45 for the three months ended September 30, 2007 when compared to ZAR2.03 for the three months ended September 30, 2007.

As we all know, it has been less than 70 busy days since our last earnings call. And I'm sure that the most important issue that our investors would require an update on is the progress made and the status of the SASSA tender. I believe that the tender evaluation committee has made significant progress. And (inaudible) were asked to present a tender submission during the week of October 22. We were able to present our full solution during a half day session, including our technological offering that incorporated our latest development in [mobile] payments, (inaudible) search engine, grant administration system and automatic credit. We also presented a unique offer to provide our services and/or our technology for the country as a whole.

In my view, which is shared by the way by our Black Economic Empowerment partners, the presentation went very well. And it is now up to SASSA to complete the evaluation process. SASSA has not given any indication when the evaluation process will be finalized. But they are well aware of the expiry date of 31, March 2008 for all the existing tenders. I believe that the evaluation process will have to be concluded within the next month to allow sufficient time for the negotiation and finalization of the new service level agreement.

Moving on to other matters, I'm pleased to report that the integration of Prism has been completed and that our initial objectives for the acquisition have largely been met. Further this year we reported on the rewarding of the National Switch and Smart Card Payment System tender by the Central Bank of Ghana. As you will recall, the tender was issued pursuant to the decision of the Central Bank of Ghana to provide the Ghanaian financial services industry access to a robust and state-of-the-art technological platform that will allow for the switching of all existing payment instruments and introduce a new biometrically protective Smart Card designed to deliver affordable financial services to the majority of Ghanaian citizens.

During the quarter, we continued with the implementation of the switch in line with our project plan. There has been a small delay in the Bank of Ghana's construction of the main computer room, but we remain confident that the system will be fully installed by the end of fiscal 2008.

During the quarter a business development trip was undertaken by Net1 to Ghana, and I'm pleased report that we've had positive responses from all 24 banks in Ghana that are required to join the switch. Since then work has begun on IT integration with each individual bank. I believe it is (inaudible) that UEPS and Ghana will and is the catalyst which will allow us to deploy our technology across West and Central Africa, as many of the neighboring central banks are showing great interest in the Ghana implementation.

Closer to home, we have made very good progress with our partners, Grindrod Bank. During last quarter I reported that we had begun with the establishment of the retail banking division. Most importantly, we initiated the process that will enable Grindrod Bank to become a member of South African National Payment System and its various payment clearing housings, or [PCH] in South Africa. And significant progress was made in this regard during the first quarter of fiscal 2008.

Grindrod Bank has been granted membership of the Payment Association of South Africa, or PASSA. And during October we successively completed the process of becoming a member of the EFT debit/credit clearing houses. And we received permission from the South African Reserve Bank to join the National Payment (inaudible) System. We have initiated the process to join other various payment clearinghouses, including debit and credit card issuing and acquiring. The pilots we have launched to date in a contained environment during the previous quarter have been extremely successful, reinforcing our view that the business case for this product is extremely viable.

Our strategy to expand the waste payment solution on a national basis in South Africa is on track, as we have identified and entered into discussion, some into agreement, with numerous bodies and organizations that can greatly assist us in fast tracking the deployment of our system.

We're following a multipronged approach. On the one hand we're targeting employee representative bodies, such as trade unions, and on the other we have identified (inaudible) such as large corporate and governing bodies. In fact, most of these organizations have been included in our SASSA tender response as part of our (inaudible) consortium, as they understand and endorse our technology, strategy, motivation and vision. And they represent the majority of all South Africans.

Our business approach is to implement a multilevel marketing structure, which will on the one hand accelerate our customer acquisition, and on the other will allow our national BE partners to participate in its financial rewards.

We continued to implement our technology in retail stores and to forge strategic relationships with some of the largest retailers in South Africa. Finally, an update on the other international initiatives that are always of great interest to our investors. Without divulging too much sensitive information, I'm extremely excited with the accelerated momentum we have achieved in numerous territories on different continents during the last 70 days. As always, I want to remind you that our mission critical objective is to deploy our technology within the territory so that it becomes a de facto payment standard. When this is achieved, we then use this new infrastructure to create new business opportunities and revenue streams for Net1.

We also continue with our research and development activities around our new mobile IP, focusing on the first-world card-not-present related transactions, as well as the functionality required for a developing economy on which we focus.

As you are aware, we have strengthened our Investor Relations function with the addition of Ilja Graulich, who is based in our headquarters in Johannesburg. And I hope that the investors will take advantage of this additional resource to further improve our investors communications.

I would like to thank you at this point for your attention and hand over to our CFO, Mr. Herman.

Good morning and good afternoon to our investors around the world. I will discuss the key trends of the first quarter fiscal 2008 compared with the first quarter of fiscal 2007, along with the key trends between the first quarter of fiscal 2008 and the fourth quarter or the last quarter of fiscal 2007.

We have also updated the frequency of questions (inaudible) in our press release to provide further clarity on the questions we were asked most often by our investors and analysts.

Again, for clarification purposes I would like to mention that my following discussion will be based on our result in rand, as this provides the best indicator of the Group's actual operational 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.

At Q1 of 2008 our average rand/dollar exchange was 712 compared to 721 to Q1 of fiscal 2007, and the same when compared with the 712 for the previous quarter.

As the Prism business has now been fully integrated into Net1's activities, we no longer provide separate information for the Prism business, except for the EasyPay components where applicable.

Revenue for Q1 2008 was ZAR429.3 million, which is up 12% year-over-year. Our gross margins Q1 2008 and 2007 were 75%, respectively, compared to 73% for Q4 of fiscal 2007. However, I would like remind you in our business gross margin is not the best indicator of the Group's profitability due to our advisors product offering. We focus on operating income, which increased by 10% to ZAR184.6 million between Q1 2008 and Q1 2007.

The overall operating margin for Q1 2008 of 43% was comparable with the 44% in Q1 of 2007. Sequentially the operating margin increased from the 41% in Q4 2007 mainly as a result of the establishment cost we incurred to prepare for the significant anticipated increase in the beneficiaries based in North West Province, (inaudible) beneficiaries from the Post Office (inaudible). Unaffected, but an affect on the operating margin in the fourth quarter of fiscal 2007 were the cost incurred as a result of the (inaudible) process.

Let us now analyze the business in more detail along our reported statements. Our Transaction-Based Activities segment had revenues of ZAR231.9 million for Q1 2008, which is an increase of 17% year-over-year on a rand basis. In aTransaction-Based Activities segment operating income of ZAR146.7 million is 10% higher than that during Q1 of fiscal 2007. Our operating margin in this segment has decreased from 57% to 54% for Q1 2008, mainly as a result of inflationary increases in our cost components that were higher than the increases we negotiated with our customers, timing differences relating to our annual price increase negotiations, and most specifically in the Limpopo Province where we received a backdated price increase during the three months ended September 30, 2006, in other words last year, cost incurred during Q1 2008 for the registration of 120,000 new beneficiaries in the North West Province, and higher revenues for Q1 2007 as a result of the earlier opening of the October 2006 pay filed for payment through our merchant acquiring system.

These profit margin decreases were partially offset by the increased revenues from price increases from the KwaZulu-Natal provincial government for welfare distribution and administration, and services provided -- sorry, and improved margins provided by EasyPay. The margin for Q1 of 2008 is higher than the margin of 50% for Q4 of fiscal 2008 due to the bulk of the North West establishment costs borne during Q4 of fiscal 2007, and the SASSA tender response cost incurred which will not repeated during the first quarter of 2008.

We expect our margins in this statement to stabilize between 55 and 60% in the medium-term, depending on the transfer rate of beneficiaries to us from the Post Office and the timing of any further provincial price increases.

Our margins in the Transaction-based Activities segment has varied quite a bit over the last five quarters largely as a result of the inclusion of EasyPay in this segment, the increase in our beneficiary base in the North West Province, and the inflationary increases in our cost components that were higher than the increases we negotiated with our customers. We would hope to sell more stabilized around the 53 to 58% level at least until March 2008. And of course our margins thereafter will depend on the outcome of the current SASSA in the process.

The total number of payments processed to beneficiaries increased from 11.17 million for Q1 2007 to 11.83 million for Q1 2008, which is an increase of 6%. Sequentially the total number of payments processed to beneficiaries was increased by 3.5% from the 11.43 million for the fourth quarter of fiscal 2007.

The largest annual and sequential increase was in the North West Province, as expected, where government is and continues to transfer the beneficiaries from the South African Post Office to ourselves. There was also, you may have seen, a significant increase in the Northern Cape. But this is a result of the South African government rezoning its provincial boundaries, with beneficiaries previously paid in the North West, being transferred across to the Northern Cape as those boundaries are moved.

We also experienced seasonality in our Transaction-based Activities operating 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 third quarter result is generally larger as a result of increased activity in January. The activation of the payment filed for any month also depends on whether the first calendar day of the month is a weekday or a Saturday or Sunday or public holiday.

During Q1 2008 our merchant acquiring system continued its impressive performance as we processed a total of ZAR1.9 billion in transactions through our merchant acquiring network compared to ZAR1.35 billion during the first quarter of fiscal 2007, and ZAR1.78 billion during the fourth quarter of fiscal 2007, all on a completed pay cycle basis. The productivity of our installed terminal base of 4,305 terminals continues to improve with an average of now 858 transactions processed per terminal during the completed phase cycles of Q1 2008 compared to 678 during Q1 2007, and 810 during Q4 of fiscal 2007.

This increased throughput from the comparable period in fiscal 2007 demonstrates the continued rapid 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 the grants at any time of the month.

The increase in the number of terminals installed is primarily as a result of additional terminals deployed in the North West Province to accommodate the anticipated additional beneficiaries transferred from the South African Post Office to us.

During Q1 2008 EasyPay processed 119 million transactions with an approximate value of ZAR26.1 billion, compared with 101 million transactions processed within an approximate value of ZAR22.8 billion during Q1 2007, and 114.2 million transactions processed within an approximate value of ZAR25.1 billion during Q4 2007. The average fee per transaction during Q1 2007 was approximately ZAR0.21. And the average fee per transaction during Q4 2007 was approximately ZAR0.20. We do not expect a significant fluctuation in rand in the average fee per transaction during Q2 of 2008.

EasyPay's operating margin, excluding the effect of intangible amortization, was 53% for Q1 of 2008 compared to 36% for Q1 of 2007 and 52% 4Q of 2007. EasyPay's margins are affected by the seasonal nature of its business, as we switch a higher number of transactions during the December and the March, April business periods in South Africa.

Our Smart Card Account segment had revenues of ZAR65.1 million for Q1 2008, which is an increase of 5% year-over-year. The total number of active Smart Card accounts increased by 5% from 3.7 million during Q1 2007 to 3.9 million during Q1 2008. Sequentially there was an increase in the number of active Smart Card accounts from Q4 of fiscal 2007 primarily due to the transfer of beneficiaries to us in the North West Province.

Our financial services business had revenues of ZAR15.6 million for Q1 2008, a decrease of 28% compared to the first quarter of 2007 and a sequential decrease of 16% compared to Q4 of fiscal 2007. Revenues from our traditional microlending business decreased during the quarter due to increased competition, our strategic decision not to grow this business, and an overall lower return on traditional microlending loans, as result of compliance with a new National Credit Act.

Revenues from UEPS-based lending decreased during Q1 2008 compared with Q1 2007 primarily due to the lower number of loans granted. In addition, on average the return on UEPS loans was lower during Q1 2008 compared with Q1 2007. The National Credit Act regulates fees and interest charged on microlending loans and imposes credit check obligations on lenders prior to granting of credit to individuals. We are experiencing lower margins and a reduction in the number of loans granted as a result of our compliance with the National Credit Act. And we expect this trend to continue in the future.

The final operating segment is our Hardware, Software, and Related Technology Sales segment. This segment traditionally includes revenues that occur on an irregular or once off basis. And it can be difficult to predict sales from year to year. This segment includes the sales of UEPS rated hardware and software, as well as the sales of subscriber identity modules, or SIMs cards, photography services and SIM card licenses. The segment had revenues of ZAR76.8 million for Q1 2008, which is an increase of 17% year-over-year, mainly as result of the customization and development activities performed during the quarter related to the tender to provide Ghana with a National Switch and Smart Card System from which we generated revenues of approximately $1 million during Q1.

Overall the operating margin of the segment increased from 11% for Q1 of fiscal 2007 to 18% in Q1 of 2008. Our effective tax rates for Q1 2008 was 37.6% compared to 36.8% for Q1 2007 and 53.1% for Q4 of fiscal 2007. The change in our effective tax rate year-on-year was primarily due to more nondeductible expenses during Q1 2008 compared to Q1 2007. Consistent with year-end we have illustrated our interpretation of the potential affects that a reduction in the STC rate will have on our results, as well as the affect of the abolishment of STC. In question 22 of the frequently asked questions section or Attachment C of our earnings press release, you will find the details of our views.

The bill which introduces or includes the legislation to change the STC rate to 10% from the current 12.5% has in fact been released. However, we do not know if and when this bill will be enacted, but we will apply the new legislation in the quarter that the change is enacted. Typically tax amendment bills of this nature are enacted in December or January.

Our Q1 2008 net income was ZAR127.7 million, an increase of 17% year-over-year. GAAP earnings per share increased by 15% them $0.27 in Q1 2007, to $0.31 in Q1 2008. In constant currency terms GAAP earnings per share increased by 13% compared with Q1 2007. Fundamental earnings per share for Q1 2008 is $0.34 compared to $0.28 for Q1 2007, which is an increase of 21%. On a constant currency basis, fundamental earnings per share for Q1 2008 increased by 20% compared to Q1 2007.

The grants of restricted stock awards in August 2007 has resulted in stock-based compensation charges of approximately $500,000, which is excluded from our fundamental earnings per share. In addition, the calculation of diluted earnings per share for Q1 2008 does not include the dilutive effect of the restricted stock awards because restricted stock awards are considered contingently issuable shares for the purposes of diluted earnings per share calculation. And as of September 30, 2007 the vesting conditions have not been satisfied.

Turning to our balance sheet, as of September 30, 2007 we had $215.5 million of cash and cash equivalents. The business remains very cash generated, and I remain comfortable that we have sufficient liquidity between our cash and cash equivalents and our current credit facility to fund our working capital requirements for the next four quarters.

When I assess the actual quantum of our cash reserves, I include our prefunded social welfare grants receivable. As it is a highly liquid, very short-term receivable this is described as a near cash equivalent.

The decrease in our accounts receivable compared to June 30, 2007 is due to all provincial governments settling the amount due to us before September 30, 2007. The increase in our other payables is mainly due to the KwaZulu-Natal October [pay file] which we opened on September 29, 2007. And that resulted in significant reimbursement to merchants occurring in the first week of October 2007 rather than in the last week of September 2007.

As result of all of this, the cash provided by operating activities for Q1 was an impressive $40.2 million. But please bear in mind that this number can fluctuate significantly as a result of the timing for the commencement of our monthly welfare payment activities, specifically through the merchant stores. The most important message to our investors has to be that our cash conversion ratio over any completed pay cycle is generally always more than 100%.

As discussed in question 21 of the frequently asked questions section of our earnings press release, we believe it is most appropriate at this point in time to retain our cash reserves to finance the expansion of the business, and to reduce the significant cost of our current and possible future prefunding of welfare grant obligation.

Overall, I remain satisfied with the quality of our earnings and financial strength as reflected by our balance sheet. Based on the assumption that our current business activities and initiatives will continue as usual, we still anticipate our fundamental earnings per share growth rate to exceed 20% on a constant currency basis for fiscal 2008. We are on track to achieve this growth rate through a combination a beneficiary growth in our welfare payment business, improved efficiencies across the Group, the contribution of the Ghana contract, and contributions from the various other initiatives in the Group.

Of course, if the U.S. dollar continues to weaken, as it has over the last few months, the GAAP and fundamental earnings per share growth rate will exceed our constant currency guidance.

Finally, a word of appreciation to our loyal shareholders, many of whom came to visit us during the last two months. We hope you are as excited as we are with our current and future prospects. With that, we will be happy to take your questions. Operator, please proceed with the Q&A.

(OPERATOR INSTRUCTIONS). Dhruv Chopra, Morgan Stanley.

Let me just start with the core pension welfare business. Outside of the North West and Northern Cape, net beneficiary growth was a little sluggish. I was just wondering if you could provide some color -- were gross adds higher, but you guys are still trying to prune and eliminate fraudulent beneficiaries? What is happening in the other provinces?

I think you'll see that the growth rates for this quarter was actually higher than it has been in quite a while. I think that is the first promising sign. The beneficiary -- potential sequential beneficiary growth rate was about 3.5%. And you will remember that over the last couple quarters it has been very flat, with the rates generally around the 1% level. So obviously there are a couple of factors that contribute to this, which unfortunately we don't have too much control over.

The key aspect for us right now and what drives the overall growth rate of course is the continued transfer that the Post Office beneficiaries brings to us. There has been I think a slower transfer of those beneficiaries that we would have liked. Again that is not completely under our control, and their are a few factors that have contributed to us not yet having all of the approximately, I think, it was 280,000 beneficiaries from the Post Office.

Most important of those, of course, is that there are significant control procedures that have to be followed when beneficiaries get transferred on the current [stock paying] system, which is a very manual and labor-intensive system. That contributed to it. There have also been some political instabilities around the North West area, mainly because of this whole change of boundary, which the South African government has initiated specifically in the North West Province. They are moving some of the towns in the North West across the borders into other provinces. And that has resulted in quite a bit of unrest over the last few months which has also delayed the process of enrolling the new beneficiaries.

Overall, the only indication that we have, as we said in the past, of the anticipated growth rate of course remains what SASSA puts out in its strategic plan, and what the government puts out by way of its budget. I think the most relevant piece of information right now is that about a week ago the government announced the mini budget, which is really the three-year projected budget for the major costs centers of the country. In terms of that, they actually revised the number -- or the amount of money allocated to social welfare payments by 6% for the next three years -- and that is per annum -- compared to what it was last year. And that obviously, we believe, is mainly a result of them having to increase the grant amount to keep track of our current inflation rate.

I hope that answers your question.

It does, but I am just talking more specifically in KwaZulu-Natal, Limpopo and Eastern Cape. Is that gross adds that you -- because KwaZulu-Natal was down a little bit sequentially? Are you still eliminating the people who are already [with] the other system? What is happening there? I'm just trying to understand that.

Yes, we will. I think that is one of the key aspects of our new offering for -- and we demonstrated that to SASSA I think with great success when we had the demonstration two weeks ago. But obviously the ability that we now have to do the one-to-many searches on our database has resulted in the removal of some beneficiaries, as we had anticipated.

There is also at the moment I think a slowdown in the number of new grant applications being processed, simply because the tender is what is important right now, and the awarding of the tender. You have got to remember that any new application will in all probability be he handled by in terms of the new contract requirement. I think at this point in time it would be fairly stupid, and I think that the (inaudible) and the government understands that it doesn't make a hell of a lot of sense to push through a huge volume of people onto a system that may well be replaced in the near future.

Then on the wage payment side, where are you -- where do you stand today on the transfer pricing negotiation with the banks?

You mean the interchange fee negotiations?

Right. Apart from all the Central Bank approval and payment associations they are trying to pick on a member of the discussions with the individual banks.

It is Serge. Really what we have done now is that obviously we have to use -- we have a dual model. We obviously have the UEPS model whereby when the UEPS is utilizing in IEPS mode, 0so we really do not have to -- we really do not have to negotiate anything because on an UEPS basis we are both the issuer and the acquirer of the transaction.

When we are acting in non-UEPS mode, or for lack of a better word, when we are utilizing non-UEPS active terminals to manage UEPS transactions, then obviously we will now fall under the existing interchange fee, which are currently charged between banks. Rather than to try to invent a new layer of fees or an independent layer of fees, which by definition would put us at a disadvantage, because we do not want to have to renegotiate those fees, its bilateral agreements, whenever it suits the banks. We would prefer therefore to use the existing interchange fees as a standard. Meaning that whenever those interchange fees are renegotiated they are renegotiated for everybody, and we do not get treated as an independent company which somebody could try to arbitrage us after the equation.

It looks like if we manage to jump over the hurdle relating [doing one-on-one], by simply sticking to what interchange fees will be levied between banks, [VisaCard], MasterCard, American Express, and Visa.

Last question is just a clarification. You did -- you recognized $1 million in revenue from Ghana in Q1. You are still saying that the remaining 17 to 19 million will be recognized through the remaining three quarters of this year, correct?

That is quite right. Because I think Herman did mention I think in the Q -- I can't remember where it was, where obviously the new switch in Ghana to be build from scratch. And they run beyond -- they were beyond the curve a little, but with -- by the amount of amount of work involved in building a properly constructed computer room, disaster recovery center, communication lines, etc., etc., took a little longer than they thought. So that sort of delayed the project a little bit. But certainly not to the extent that it is going to affect the large implementation or the full delivery after the required time frame.

As far as we are concerned, by definition it might have weakened our first quarter a little, because of the fact that some of the revenue didn't come through now, but certainly will come through in the second quarter and then the third and the fourth. All it means is that other quarters are going to be a little stronger just because of Ghana slipping back up by a couple of months.

(OPERATOR INSTRUCTIONS). Dave Koning, Robert W. Baird.

Nice results. First of all, I guess just refreshing on the guidance, the 20% constant currency growth, you are still compensated fully if you hit 25% or better, is that correct?

Correct, yes.

So you're still really driving for that, even though the guidance obviously is 20%?

No, we would prefer to get our bonuses, yes.

Since you have asked, so --.

We would obviously prefer you to get your bonuses then too, so we're hoping for 25%. Secondly, I guess on the tax rate change, I know you mentioned December/January time frame is generally when we could expect them to come to a final conclusion. Should we change our models now to 29% or should we really wait until you report this quarter, and by then we will now with more certainty what the government decides?

I would wait if I were you, simply because the (inaudible). And the way things go at this time of the year the [sittings] of our Parliament sort of wind up for the (inaudible) period. It is not entirely clear if the final bill will be presented for promulgation before the break.

Unfortunately that is one of the key differences between u.s. GAAP and IFRS. In terms of IFRS we would have been able to account for the lower rates already, but in terms of U.S. GAAP weakened only affect a change when it is enacted by the President. So I would wait and see what happens. If it happens in December, I think we will alert you to the fact that it has happened, otherwise let's keep it until January.

That sounds great. I guess finally on Nigeria, this is obviously something that can be such a huge opportunity for you. I'm wondering if, first of all, you can just outline any recent developments there? And then just refresh as a little bit on the opportunity and when maybe that will even start to produce some revenue.

Nigeria, where we are at the moment, nothing much has changed from a structuring or infrastructure point of view. That is number one. What is important what has happened is that Brenda Stewart, as you know, Senior VP Marketing and Sales, did a brilliant job in Ghana. And it is strange, but a number of banks of course that actually are in Ghana also are Nigerian banks. Already this is creating a little bit more impetus in Nigeria in terms of basically funding new shareholders in the switch.

But from an operational point of view we have now engaged fully with Diamond Bank, which is committed to the project. They have already identified a (inaudible) of what they call initial, not so much pilot, but basically the initial rollout. And most of the banks are going up at this point in time to rollout into the community banks. Now the beauty about this is that in totality the community banks probably have between 5 and 6 million customers. Now this that to us is the best or greatest opportunity to take off with. Which we are now going to be doing very much as they a closed team, not only between SmartSwitch Nigeria and Diamond Bank, but between Net1 and Diamond, we have not just redeveloped basically a franchise system. And that we intend to participate together with Diamond Bank and with (inaudible) for generating new income stream for Net1 for [both] 80% shareholding in the switch.

In other words, the switch, as we all know, much have royalties and transaction fees, but at the end of the day the switch does not profit through the financial products that are being sold because of the technology. So by doing a franchise system, we with Diamond Bank, and they are very, very, very, open and very, very positive in doing that with us, we're hoping to be able to get into the second-tier income stream. Which as you know is on average 7 to 9 times greater than the amount of money that the switching transaction or processing transaction can be.

So that we believe is still incredibly exciting. And we have decided to put all of our efforts into this initiative first and foremost before we even contemplate issuing or selling equity into any other bank in Nigeria at this stage.

Sean Kane, Morgan Keegan.

My question is, it seems like there's a lot of buzz going around the world about this cell phone to cell phone money transfer. I know you guys are running a couple of pilot programs. Where do you see opportunities for you to get in front of this wave and capture that opportunity?

Well, thanks for this. I think the question is a very valid. It is actually always very interesting that as soon as somebody starts doing something then everybody is talking about having done it or wanting to do it.

I think the way we see, or at least our initiative, the one thing that we have always done in the past is that we don't really look beyond us, we always look ahead of ourselves. We certainly have got two major initiatives which we believe are going to be very, very, very exciting.

The first one which is already underway is to utilize cellular phone technology, specifically on new patents, in the developing economies. And we have already got approval in one country with one of the cell phone companies to go ahead and to implement on a national scale. In fact, the country has now, withheld or stopped any other payment system that can been delivered through cell phone until our initiative has been fully implemented and actually put to the test, which we found very, very, very exciting.

On the other front which is more the (inaudible) and developing countries, as you know, we did announce that we have employed a new person, whose job was going to focus on utilizing our new IP, our new patents to attack the card -- not Prism transactions. In other words, transactions that got normally made over the Internet, or made over simply a telephone in order to book or to buy or to prebook a hotel, whatever the case might be.

Now we have already gone to this state where we are pretty much finalized the technology, as well as the business plan. In other words, we're more or less on schedule, give or take a couple of weeks, on what we were planning. And I think over the next three months, you're going to see the first initiative in the United States, because that is the country I want to go after first, considering that is where most Internet transaction and card (inaudible) transaction take place.

One of our big focus is to attack the U.S. and to solve the problem which is talked about all the time, which is the increasing fraud due to the cloning of the [Next Track] cards or the cloning of other cards, and specifically the stealing of people's personal data, identities and Facebook through the Internet and all sorts of other things. That is going to be our major attack. And I think you're going to see some very, very active and positive results in a very short term.

That's great. I appreciate that. My other question is in some previous calls you mentioned that your goal was trying to bring a new relationship per quarter. And if I have been keeping up with it right, I think we may be a little behind that. Do you guys still feel like on average you will bring about one new relationship a quarter?

Once again, you are right. If you do the counting three months at a time we are a little behind. Perhaps not as behind as you might even think. I think there was perhaps a bit of an innuendo. Sometimes we fool around at the wrong time. It would be nice if sometimes we arrived a week later sort of thing. You know what I mean.

At the end of the day I'm still very comfortable that we are going to get the type of acquisition in terms of countries that we talked about. Specifically in the next couple of quarters, I have no doubt. It will depend on the size of the countries that we signup in terms of how many other countries we will signup. In other words, if we are signing a small country, like a Libya or whatever, then certainly three or four of those countries a year we don't believe is a major issue.

If on the other hand we're going to be signing a country with 2 or 300 million people, to be quite honest once we have done that, we would rather focus on deploying and implementing the technology in those countries rather than to sign another country of 1.5 million people.

As we go along, depending on the country that actually we signup, you'll see that the plan might not be four. It might only be three in a particular year. It might only be two. On the other hand, it could be five or six if they are all very small.

(OPERATOR INSTRUCTIONS). [Andy Nahaus], Prospect Fund.

You mentioned in the opening remarks that you felt that things went well with SASSA a couple of points go from a Black Empowerment perspective. I was just wondering why you felt that?

Once again, this is Serge. When you remember that one of the -- one of the critical things about these presentations is that you do meet with around 30 or 40 people from the SASSA, although the evaluation panel is a much smaller group. In other words, although you have 30 or 40 people that listen to all of the presentation, you only have seven people that actually ask questions.

But you do tend to have a tea break, and you have a drink after the event of whatever the case might be. And obviously, our (inaudible) group that was quite extensive at the time. I mean we were allowed to take ten people only in order to attend the presentation or to present, which I think seven of those ten people were part of our BE Consortium.

And obviously the BE Consortium, they do have the ability, they do have relationships, they have the ability to speak the language. And therefore when we did a debriefing session after our five-hour stint, we were able to get some feedback from then. And certainly what they had heard from SASSA as a whole [we got] as opposed making any direct or definitive commitment. What came back to us over and over again is that SASSA was certainly incredibly impressed with the technological solution that we had put on the table. They really did not even believe that that type of technology was even available anywhere in the world, let alone even in South Africa.

Remember that what we did propose is one step more above to what we guarantee using today. Certainly that is something we were very pleased about because (inaudible) as you know is our focus -- is a technology is a focal point.

Certainly at the time of the presentation the financial bids had not yet been opened. In other words, they could be no feedback on our financial competence or financial ability to compete, simply because they wanted to ensure that only technology and business process would be evaluated at that point in time by the panel. And of course the BE component would be evaluated as well.

I think when the BE component, again what we had put on the table they said was actually what they called -- is probably one of the better structured or one of the best BE deals in terms of not being fronting, in terms of not being condescending to perhaps the BE partnership, and to really utilize the BE strength as much as possible.

So on those two fronts, I felt far more confident to hear it back, or to get feedback from our BE partners than simply for us to actually look at people's faces and to actually say, well, they look reasonably happy. This is why it felt it was important to mention it because after all we feel that our BE partners are far closer to the action in terms of getting -- of gauging what people are thinking than what we are.

Finally, I left a couple of messages for both of you regarding a project I have at the Governor's office in California, who are looking for a solution for what they estimate to be one out of every four adults in California not having a bank account. And I have not heard back from either of you, and I guess I was wondering why.

To be quite honest, I'm actually surprised. I am looking at Herman and he is looking at me. To be quite honest, I would be very surprised. And Brenda, did you see anything?

No.

Brenda has seen nothing either, which means I am sure that if got to my desk, I would've opened it up and I would have pushed it to Brenda. We apologize for that, but today we do live in the world of the Internet, with firewalls, which means it could easily be a possibility that for whatever reason this thing was thrown out. Do you mind sending it again to us?

Actually, I left phone messages for all three of you. So if you could just be a little better about returning phone calls, I think that might help.

Fantastic. We now know, as you know, we have now got a new investment relation, gentlemen, that is attending this conference. And I am positive that if there's anything I get in the future, I hope we will be a little bit more responsive. We must apologize, but the last couple of weeks and couple of months Brenda has been traveling. And candidly I have been completely locked up in you know what. So it has been very, very, very difficult perhaps to be as responsive as we should be.

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

On my side again, once again, I would like to reiterate that we're feeling today very, very comfortable with our results at this point in time. We know we could have been slightly higher, because we could have recognized some extra revenues, specifically from Ghana. But candidly, that will come. I'm not too worried about that.

We believe that our pension and welfare business is running well. And more excitingly I think we're starting to really see the momentum that we have created in international business development to come to the foreign. People are asking us to diversify and to win some countries outside of Africa. That is what we have been focusing on. And I think we're going to achieve that sooner rather than later.

So I'm very excited about this as well. And really at this point in time we're seeing the rest of the year to be very, very, very successful. And certainly, like Herman mentioned, at 20% plus for our bonuses -- 25% plus, to be definitely achievable. So thanks very much for everybody for attending the conference call, and we look forward to a very, very good end of the year.