Lesaka Technologies Inc (LSAK) 2008 Q2 法說會逐字稿

Good afternoon and welcome to the Net1 second-quarter fiscal 2008 earnings conference. All participants are now in listen-only mode. There will be an opportunity for you to ask questions at the end of today's presentation. (OPERATOR INSTRUCTIONS) Please note that this conference is being recorded.

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

Thank you very much. Good morning to our investors in the US, and good afternoon to our investors in Europe and of course in South Africa. Thank you very much for joining us all on our fiscal 2008 second-quarter earnings call. Let me take this opportunity to wish you all a prosperous and healthy 2008.

As usual, Herman Kotze, our CFO, is with me today. Both our press release and our 10-Q 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 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 SEC rules. Where required by these rules, we have provided a reconciliation of the non-GAAP measures to the most directly-comparable GAAP measures as exhibits in the press release dated yesterday.

We will primarily discuss our 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 the actual underlying trends of our business.

The Company's results can be significantly impacted by currency fluctuations between the US dollar and the South African rand. 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 10-K, our 10-Q, and press release; and we advise our investors and analysts to review the Company's result in terms of US GAAP.

During the second quarter of fiscal 2008, the South African rand strengthened against the US dollar. However, as most of you are probably aware, the trend in the USD/ZAR exchange rate has reversed and the USD has strengthened significantly against the South African rand in the last two weeks. We expect this volatility to continue during our third quarter.

At the risk of sounding a little repetitive, I am once again extremely pleased to report on an excellent good quarter for the Company as a whole, especially as the second quarter of the fiscal year is traditionally our weakest quarter.

As you are aware, we provide additional non-GAAP measurements -- namely fundamental net income and fundamental earnings per share -- that eliminate, among other adjustments, the significant non-cash accounting increase required by GAAP for intangible asset amortization and stock-based compensation charges.

On this basis, we have shown an increased in fundamental net income of 53%. From ZAR112.7 million for the three months ended December 31, 2007, to ZAR150.2 million for the three months ended December 31, 2008. This translates into a fundamental earnings per share increase in South African rand of 33%, from ZAR1.98 per share to ZAR2.63 per share.

As an aside, please note that this increase that we have achieved in USD would have been around a 44%.

I would like at this stage to thank very much my executive team and all the personnel of Net1 for the incredible work that they have achieved during this quarter, taking into consideration, A, that December is a summer holiday month and season; and B, that very often they had to work without electricity, a problem which has and is affecting our and many other companies' productivity.

We, of course, have now initiated our defined business continuity plans which, among other things, provide full power to all of our departmental units, thus ensuring a little disruption as possible to our business activities.

I should also mention that because our UEPS systems were designed to work in environments that did not have power or telecommunications infrastructures, we were able to continue operations without any impact whatsoever on our customer base. In other words, although not desired, the power cuts we are experiencing have demonstrated that our technology can operate, and in fact does operate perfectly well in any environment that lacks basic infrastructures.

You will recall that I indicated during our last call that I was optimistic that the SASSA tender would be awarded before the middle of December. My view at that time was based on the fact that the ruling party in South Africa -- namely, the African National Congress or ANC -- held the elections during the early part of December. As such, the current Ministry of Social Development would wish to finalize such a tender, as any change in the party's leadership could lead to delays due to the transfer of responsibilities and portfolios from the current to the newly-elected members of the ANC's national executive.

As you are aware, we received notification in the middle of December 2007 from SASSA asking us for further information on our tender bid; specifically on our pricing model. We submitted the additional information requested on the 28th December, 2007.

Last week, SASSA requested all bidders to extend the validity of their submission from 9th February to the end of March 2008. Their reason was perhaps not as clear as we all wished it would have been. We have confirmed to SASSA that our tender bid will remain in full force and effect until March 2008.

As you maybe aware, our five existing contracts to provide welfare administration, electronic, and cash distribution services expire on March 31, 2008. We currently believe that these existing contracts and those of our competitors will be extended by at least six months in order for SASSA to adhere to the minimum implementation time frame specified in the tender specifications.

I would again like to reiterate that our successful record with our provincial government contracts and our ability to provide uninterrupted service, even under the most difficult conditions, will ensure that we retain our existing contracts for the foreseeable future and hopefully gains further contracts in provinces in which we do not operate.

I am of the strong opinion that under any circumstances we will continue to play a major role in the delivery of such critical and essential service to the people of South Africa. I also believe that under any of the possible outcomes -- including the extension of our existing contracts, the cancellation of the tender, or the award of the new tender -- we will continue to generate and grow the revenue and profitability of this segment of our business in the medium to long term. As always, we will keep our shareholders fully briefed on the developments with regards to the SASSA tender.

Our contract with the Central Bank of Ghana to implement the new modern and secure national payments system continues to gather momentum and at this point has exceeded certainly all of my expectations. The international division, has made better than good progress during quarter two 2008; and the completion and launch of the first phase is scheduled for the beginning of the fourth quarter. It is expected that the Ghanaian National Switch and Smart Card Payment System will be fully operational by the end of the fourth-quarter fiscal 2008.

During January of 2008, the Central Bank of Ghana announced that it is mandatory for all financial institutions -- that is, banks, community banks, credit unions, and the like -- to participate in the UEPS National Switch. As a result, we anticipate that 169 different financial institutions will drain the new payment system. It is also mandatory for all of these existing and new account holders of any financial institution to be issued with a UEPS smartcard.

We are also very excited by the new Central Bank of Ghana's order for an additional 1.5 million smartcards, 2000 point-of-sale devices, 810 registration workstations, and 254 wage payment workstations.

We have also been asked to facilitate the upgrade of all existing ATMs in Ghana in order for them to be and to become UEPS compliant. We anticipate delivery of these additional requirements to be completed by the end of calendar 2008.

We have also been given the authority by the Central Bank of Ghana to put in place relationships with any number of the Ghanaian financial institutions to assist them with product definition for the best methods to utilize their UEPS. This authority should give us another avenue through which we can derive transaction fees and fee-based recurring income.

This will, I hope, explain to our investors that the selling of technology does not preclude recurring income streams; and that in fact it might well facilitate the same.

As I have said previously, the deployment of the UEPS in Ghana is a catalyst which will allow us to deploy our technology across West and Central Africa, as many of Ghana's neighboring central banks are already showing great interest in the Ghanaian implementation.

I firmly believe that we are the first company worldwide which has been given the opportunity to deploy a national payment system based on its technology, and we intend to make an absolute success of this implementation, as it could lead to our UEPS becoming a world standard as it is installed in so many other emerging economies.

Back to South Africa. I am pleased to report that we have made strong headway in our partnership with Grindrod Bank. While it may seem to a lot of people that this project is moving slowly, many behind the scene but fundamental events needed to and have taken place in order for this project to be rolled out on a national basis.

Some of these milestones include strategic issues, commercial contracts, technological adaptations, the development of financial products, and, more importantly, the identification and appointment and training of the organization that will perform customer acquisitions on a large scale.

Other essential criteria include the future ownership of the bank itself, retailer long-term contracts, the acceptance of the UEPS at point-of-sale, our morphing EMV UEPS technology, and of course further identification and agreement with organizations that will not only acquire customers but of course will also assist us to sign up employers.

Our international market penetration continues to gain momentum as can be demonstrated by negotiations. We have already signed a temporary agreement in Indonesia. This agreement is structured a little differently to our standard agreements, as it provides for the commercial and legal facets of Islamic -- or, commonly known as Sharia -- banking. There is no doubt that there are many countries in the world where the Sharia banking concept has prevented investments as well as the deployment of technological solutions.

The basic fundamental of Sharia banking is that no one party should carry the risk in any venture; and that the parties should be rewarded proportionally to the benefits derived by the business implemented. We are of the opinion that our systems are designed and thus capable to support those philosophies. As a result, we can see that many opportunities exist for us to penetrate these markets, while taking into consideration the beliefs and cultures of these communities.

We have also decided to modify our current product offering to allow smaller countries to use our technology without having to purchase, install, and operate their own back-end UEPS system. This approach will break down barriers to entry by allowing smaller developing countries to outsource all of their payment system requirements to us, and to then focus on product sales and customer acquisition.

We believe that this methodology will allow the rapid deployment of our systems and shorten the time of implementations. Furthermore, our reward for such outsourcing will be based on ongoing transaction fees for all transactions processed, rather than purely on the upfront sales of systems and the associated hardware components.

It will also put us in a much better position to manage and maintain these systems, allowing us to add further value to local financial organizations by offering advice and resolving problems in a much faster manner.

This outsourcing model is about to be launched for a number of smaller countries, or countries that have no infrastructures. We intend to replicate this model by setting up processing centers in other continents.

These countries already include Mozambique, Lesotho, Liberia, Swaziland, Iraq, and Tanzania. It is anticipated that we will implement such centers of service in Asia-Pacific, probably [split] in Australia, Africa, and the Middle East, through South Africa, Eastern Europe, Russia and other CIS Republics through Austria or Switzerland, as well as North and South America through North America.

We have also made headway in defining our marketing attack for the world of card-not-present transactions. Our dedicated team has demonstrated the technology to many different organizations in first-world economies, and the responses we have received thus far are more than encouraging.

As we all know, card-not-present transactions -- that is, payment made across the Internet or over the phone -- are by far the most convenient payment channels, but are not used to the fullest due to security risk and the potential for fraud.

Our latest patents, together with the products we have developed on mobile handsets, eliminates these risks and barriers to entry. We thus believe that the growth for these types of transactions, which include local and international money transfers, can be accelerated and made available in countries where they have never been implemented in the past.

As our Company matures and as we become better known on the world stage due to the power of our technologies and the proof that these work, we continue to build capacity and to adapt our offering in order to generate the best possible return for our shareholders.

I predict that we will have a very good third and fourth quarter and that our long-term growth, stability, and profitability looks extremely positive.

I would like to thank you all for your attention, and hand over to Herman for him to give you some detail of the financial results. Thank you very much for your time. Over to you, Herman.

Thank you, Serge. Good morning and good afternoon to our investors around the world. I will discuss the key trends of the second-quarter fiscal 2008 compared to the second-quarter fiscal 2007, along with the key trends sequentially between the second and first quarters of fiscal 2008. 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 our 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 that is a non-GAAP measure. In order to review our results in terms of US dollars and GAAP, please review our quarterly filing on Form 10-Q as well as our press release filed yesterday.

For Q2 of 2008, our average rand/dollar exchange rate was ZAR6.78 compared to ZaR7.32 for Q2 of fiscal 2007, and ZAR7.12 for Q1 of fiscal 2008. Looking at the current situation, the rand has weakened significantly against the US dollar during the first half of our current quarter, or Q3, and is currently trading at around ZAR7.70 to the dollar.

Any significant weakening of the rand obviously reduces the dollar equivalent results of our South African operations, which is why we provide you with cost and currency information in our press release and on this call, as the core operational drivers are clearly visible from these numbers.

I'm very pleased with our second-quarter results which reflect our most profitable quarter ever. Due to the seasonal nature of some of our core activity, the second quarter is traditionally the softest quarter, which further underlines the exceptional trading performance of the Group during the reported period.

Revenue for the second quarter of 2008 was ZAR464.2 million, up 28th% year-over-year. Our gross margin for Q2 2008 was 71% compared to 77% for Q2 2007 and 75% for Q1 2008.

However in our business, gross margin is not the best indicator of the Group's profitability due to our diverse product offering. We focus on operating income, which increased by 50% to ZAR191.3 million between Q2 2008 and Q2 2007. The overall operating margin for Q2 2008 and for Q2 2007 was 41%.

Sequentially, the operating margin decreased from the 43% in Q1 2008, mainly as a result of inflationary increases in our cost components, specifically our annual salary adjustments effective in October every year, and lower high-margin software development revenues related to the Ghana contract compared with Q1 2008.

Let's now analyze the business along in more detail using our reported segments. Our transaction-based activity segment had revenues of ZAR271 million for Q2 2008, which is an increase of 24% year-over-year on a rand basis. In addition, our transaction-based activity segment operating income of ZAR144.9 million is 13% higher than Q2 of fiscal 2007.

Our operating margin in this segment has decreased from 58% to 53% for Q2 2008, mainly as a result of the following three factors. One, inflationary increases in our cost components that were higher than the increases we negotiated with our customers. Two, timing differences relating to our annual price increase negotiations, specifically in the Limpopo province, where we received a backdated price increase in Q2 of the prior year. And three, lower revenues earned during the first half of fiscal 2008 compared with the first half of fiscal 2007, from our social welfare payment business due to the timing of the commencement of our January payment activities.

To clarify, in late December 2006, we had commenced payment activities in all five of our provinces, which was not the case during late December 2007. These timing differences will occur from year to year and month to month as our decision on when to commence activities for a pay cycle depends on factors such as whether the first calendar day of the month is a weekday or a Saturday, Sunday, or public holiday, as well as specific requests from the government.

These profit margin decreases were partially offset by the increased revenues from price increases from the [full] provincial government for welfare distribution and administration services. The price increases from our welfare parent contracts are regulated by the various service level agreements and are generally a factor of the South African inflation rate. We will continue to receive these inflation adjustments for as long as our current contracts are valid.

The margin for Q2 2008, the 53%, is sequentially lower than the margin of 54% for Q1 2008, primarily due to the timing of revenue recognition resulting from the timing of the opening of the January [pay file] as I explained earlier.

If we disregard the disruptive effect of the timing of payment activities, the operating margin of this segment remains between 55% and 60% per month. We will discuss our cash flow results later, but I want to emphasize that the timing of our payment activities also has a material effect on our cash flow results.

The total number of payments processed to beneficiaries increased from 11.32 million for Q2 2007, to 11.9 million for Q2 2008, which is an increase of 5%. Sequentially, the total number of payments processed to beneficiaries increased by 0.6% from the 11.83 million for Q1 2008. In other words, fairly flat.

The largest annual increase was in the North West province, where government continued with the transfer of beneficiaries to us from the South African Post Office.

There was also a significant increase in the Northern Cape, but this is the result of the result of the South African government's rezoning of provincial boundaries, with beneficiaries previously paid in the North West transferred to the Northern Cape.

Sequentially, the increase in beneficiary numbers is low as a result of reduced activity during the summer holiday period in South Africa.

The transfer rate of beneficiaries from the South African Post Office in the North West province to us decreased significantly during Q2 as a result of technical difficulties experienced by the various agencies responsible for the process. We believe that this transfer rate should improve in the next four months.

During Q2 2008, our merchant acquiring system continued its impressive performance as we processed a total of ZAR1.87 billion in transactions through our merchant acquiring network compared to ZAR1.38 billion during Q2 2007 and ZAR1.9 billion during the first quarter of 2008, all on a completed pay cycle basis.

The productivity of our installed terminal base of 4,304 terminals has stabilized at an average of 851 transactions processed per terminal during the completed pay cycles of Q2 2008, compared to 683 during the second quarter of 2007, and 858 during the fourth quarter of fiscal 2007.

This increased throughput from the comparable period in fiscal 2007 demonstrates the continued rapid acceptance of our cardholders as they become familiar with and accustomed to the convenience associated with our merchant acquiring initiative, as they can receive and spend their grants at any time of the month.

Compared with Q2 2007, 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 Q2 2008, EasyPay processed 135.3 million transactions with an approximate value of ZAR50.3 billion, compared with 117.6 million transactions processed with an approximate value of ZAR27.2 billion during Q2 2007, and 119 million transactions processed with an approximate value of ZAR26.1 billion during the first quarter of 2008.

The average fee per transaction during Q1 and Q2 2008 was approximately ZAR0.21. We do not expect a significant fluctuation in rands in the average fee per transaction during the third quarter of 2008.

EasyPay's operating margin, excluding the effects of intangible amortization, was 53% for Q2 of 2008 compared to 52% for Q2 of 2007 and 53% for Q1 of 2008. EasyPay's margins are affected by the seasonal nature of its business, as we switch a higher number of transactions during the December and March-April festive period in South Africa.

Our smartcard account segment had revenues of ZAR65.3 million for Q2 2008, which is an increase of 5% year-over-year. The total number of active smartcard accounts increased by 5% from 3.8 million during Q2 2007 to 4 million during Q1 of 2008. Sequentially, there was no significant movement in the number of active smartcard accounts.

We realize that there is some frustration that our wage payment initiative has yet to result in a significant number of new cardholders. But we want to reiterate that we're currently focused on putting in place all core aspects of launching such an important and massive initiative. This includes product definition, pricing, and the establishment of a robust marketing and distribution network.

We have made significant progress on all these fronts, and we remain confident that our strategic goal of servicing 1 million wage payment cardholders over the next three years is achievable.

Our financial services business had revenues of ZAR14.5 million for Q2 2008, a decrease of 29% compared to Q2 2007, and a sequential decrease of 7% compared to Q1 2008.

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 a result of compliance of the National Credit Act.

Revenues from UEPS-based lending decreased during Q2 2008 compared with Q2 2007 primarily due to the lower number of loans granted. In addition, on average the return on these UEPS-based loans was lower during Q2 2008 compared with Q2 2007.

The final operating segment is our hardware, software, and related technology sales segment. The 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-related hardware and software as well as the sales of subscriber identity modules, or SIM cards, cryptography services, and SIM card licenses.

The segment had revenues of ZAR113.4 million for Q2 2008, which is an increase of 86% year-over-year, mainly as a result of the delivery of hardware and customization and development activities performed during the quarter related to [tender] to provide Ghana with the National Switch and smartcard system, from which we generated revenues of approximately $5.6 million during Q2.

To date, we have recognized revenue amounted to $6.5 million relating to the Ghana contract. We expect to complete the initial installation and customization of the system during the third quarter of fiscal 2008.

In addition, we generated revenue of approximately ZAR13.8 million from sales of terminals to [Napac]. Overall, the operating margin of this segment increased from 7% for Q2 2007 to 14% in Q2 2008.

Our effective tax rate for Q2 2008 was 36.7% compared to 40.7% for Q2 2007 and 37.6% for Q1 2008. The change in our effective tax rate year-on-year was primarily due to fewer nondeductible expenses during Q2 2008 compared to Q2 2007.

On January 8 of this year, 2008, the Revenue Law's Second Amendment, or Act 36 of 2007, was promulgated. The Revenue Laws Act included the legislation to reduce the rate of secondary taxation on companies in South Africa from 12.5% to 10% effective from October 1, 2007.

Since the Revenue Laws Act was only promulgated in the third quarter of 2008, in terms of US GAAP the fully distributed tax rate for the second quarter of fiscal 2008 remains at 36.89%. The fully distributed tax rate will be reduced to 35.45% from 36.89% during Q3 of 2008.

We have illustrated our interpretation of the potential effects that a reduction in the STC rate will have on our results, as well as the effect of the abolishment of STC in its entirety, in question 20 of the Frequently Asked Questions sections, or attachment C, of our earnings press release.

Our Q2 2008 net income was ZAR137.7 million, an increase of 57% year-over-year. GAAP earnings per share increased by 57% from $0.23 in Q2 2007 to $0.36 in Q2 2008. In constant currency terms, GAAP earnings per share increased by 47% compared with Q2 2007.

Fundamental earnings per share for Q2 2008 was $0.39 compared to $0.27 for Q2 2007, an increase of 44%. On a constant currency basis, fundamental earnings per share for Q2 2008 increased by 34% compared to Q2 2007.

The growth of restricted stock awards in August 2007 has resulted in stock-based compensation charge of approximately $800,000, which is excluded from our fundamental earnings per share.

In addition, the calculation of diluted earnings per share for Q2 2008 includes the dilutive effect of a portion of the restricted stock awards granted, as these restricted stock awards are considered contingently issuable shares for the purposes of the diluted earnings per share calculation; and as of December 31, 2007, the vesting conditions in respect of a portion of the awards had been satisfied.

Before turning to our balance sheet, I would like again to mention that our cash provided by operating activities can and does fluctuate significantly as a result of the timing for the commencement of our monthly welfare payment activities, specifically through merchant stores.

Our cash flows from operating activities for Q2 2008 illustrate this impact that the timing can have on reported cash flows. We would expect positive operating cash flows for Q3 2008. However, this may again be impacted by the timing of the payment of pre-funded grants and the receipt of cash from the provincial governments.

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%.

Now turning to our balance sheet, as of December 31, 2007, we had $200.7 million of cash and cash equivalents. The business remains very cash generative. And I remain comfortable that we have sufficient liquidity, between our cash and cash equivalents and our current credit facilities, to fund our working capital requirements for the next four quarters.

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

The increase in our accounts receivable compared with June 30, 2007, is largely due to an amount due from the KwaZulu-Natal provincial government as of December 31, 2007, which was settled in early January 2008; an amounts due from the Bank of Ghana.

The decreases in our income taxes payable is due to obligatory payments of large provisional taxes during the half-year to December 2007.

As discussed in question 19 of the Frequently Asked Questions section of our earnings press release, we believe it most appropriate at this point in time to return our cash reserves to finance the expansion of the business; to reduce the significant cost of our current and possible future pre-funding of welfare grant obligations; and to execute relevant acquisition opportunities.

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 of growth in the attributable revenue per unit 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.

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

(OPERATOR INSTRUCTIONS) Dhruv Chopra of Morgan Stanley.

Yes, good afternoon, gentlemen. I guess, let me just start with sort of the newest issue, which is the power crisis. I think we follow why some of your service does not get disrupted? But what does the productivity -- what issues or impact does the productivity have?

Secondly, are you seeing any change in impact on some of your competitors and banks?

It's Serge here. Yes, obviously, the sudden implementation of load sharing --

Load shedding.

Shedding, which is really the same as load sharing, considering we have to share what is there, certainly really created an environment that made it difficult for people to operate.

From the point of view that in terms of the productivity in the office environment where people cannot work on their PCs or use -- suddenly you have no lights, or your servers don't work, or it takes you two hours to go to the next meeting rather than 20 minutes because the traffic lights are out. So there is absolutely no doubt that there has been a lot of disruptions for many businesses throughout South Africa because of the lack of power.

Obviously, in our environment, we have had always our disaster recovery plan in place. We have obviously activated some of those plans that have allowed all of our, let's call them, critical services to operate with immediate effect.

I don't believe anybody thought that the power disruptions were going to continue. In fact, we now know they are likely to continue for the foreseeable future. So we have obviously activated our plan B, which means that within the next few weeks we will be in the position that all of our services, in critical or not, will be able to continue to operate without any interruption.

That does not mean, of course, that other businesses are not affected. It does not mean that we can obviously provide power to traffic lights. So there is no doubt that it is affecting still the ability to perhaps communicate face-to-face with other people or other customers.

As far as we are concerned, we are back on track and at this point in time we don't really believe that the electricity unavailability is going to have any sort of impact on our productivity in the next quarter.

There is no doubt that your point was valid, Dhruv, that obviously when it comes to banks and when it comes to obviously technologies which are very much dependent on electricity or networking -- because obviously people like MTN, Vodacom, cellular phone networks, other communication networks -- were also affected by power failures and resulted in many different online systems going down.

There is no doubt that this is giving us a very, very big advantage by in effect having proved categorically now to government -- and, candidly, to other organizations -- that our system can continue to operate absolutely and completely as before regardless of any electricity failures.

The net effect has been something which has been very, very good for us. Because nobody before wanted to switch off the grid in either to prove our point. This way, we don't have to ask for it; they did it all by themselves. But I mean at the end of the day it was great to be able to show everybody that we could pay all 4 million people on time without any disruptions whatsoever.

So I think it answers the question; but going forward we feel very confident that we at Net1 are not going to be affected in terms of implementing our business plans as much as perhaps many other organizations will be, simply because they will not be able to operate effectively or in fact operate at all.

Excellent. Then great work on Ghana. If we could just spend a minute there, and sort of just walk us through. So what has changed in the last couple of months, where you went in with initially the 23 banks; and the Central Bank just recommended it, now making it mandatory? So, walk us through the process of what happened.

Then secondly, is that likely to impact or accelerate some of the work that is happening in Nigeria, since both countries are so close?

I think it is, again, it's a very, very good point. I have got a feeling many people have underestimated what this Ghanaian contract actually means.

As you are aware, the tender was purely for us to deploy a national payment system with very much the smartcard component, to allow Ghana to basically bank or offer banking services at an affordable cost to more Ghanaian people. That is the way it kicked off.

Initially of course the people that are normally targeted to do this are the -- what I would call are the first-tier banks. What the Central Bank then decided to do is to say -- there are many other financial organizations in Ghana who are not what you call your typical first-tier banks, [or] second-tier banks and third-tier banks. Credit unions, building society [top] banks, as well of course as what they call the Apex Banks which are really community-based banks.

What then the Central Bank decided to do is to say no, no; in order for this to work correctly, we need to ensure that all financial institutions in Ghana have to and must participate in a new payment, national payment system. That is one of the very first regulations that was stipulated.

Now, following this, the next change of mind by the Central Bank was to say -- we believe that if we want to take full advantage of the benefit of the UEPS technology, including the ability, for example, to detect and to prevent money laundering, the ability to eliminate ghost workers, through our [one to many] search engines as well as our fingerprint technology. And the ability to eliminate fraud, to eliminate the possibility of card stealing, as you know can occur with mag-stripe, or in fact enable for people to steal cards, which may or may not be protected by PINs.

In order to achieve all of that and to get real benefit, the Central Bank of Ghana decided that it would be mandatory for all the cardholders, regardless of the institution in which they are banked, to be issued with a UEPS card. In other words, all people in Ghana that have a bank account in any bank, it is mandatory for that bank to issue them with a UEPS card.

So UEPS becomes by definition, mandatory and becomes the only payment of choice, or the payment system channel that has to be implemented.

That of course led to a lot more orders, that Brenda of course took immediately. Namely, they kicked off the system with around 0.5 million cards. They immediately placed a further order for 1.5 million cards, giving us a total of 2 million. Which by our calculation implies that those 2 million cards are initially going to be issued to in fact the people that are currently banked, which is around 10% of the population.

So we can expect further orders to come through, as in fact the intention of the Central Bank was not only to bank the existing people, but certainly to bank the people that were unbanked.

Now, that also led to a number of new orders regarding point-of-sale devices. The further breakthrough that came through is when the Central Bank made it mandatory for existing ATMs and all-new ATMs to become UEPS compliant.

That is something that our technical teams and business teams are working on in order to ascertain what are going to be the difficulties, if any, to work with ATMs suppliers around the world, because they are all there, as you can imagine.

As well as the people that supply ATM software, that today are very good at providing systems that support mag-stripe, a la Visa, MasterCard. Unfortunately, these systems are no longer the mandatory ones; they now have to support UEPS as the mandatory one. The other systems are becoming optional.

So we are working really hard at defining what modification and how these modifications can be made very quickly by working with the suppliers both of hardware and software to ensure that Ghana becomes a UEPS country as per the requirement of the Central Bank.

The last thing that this is -- which I think is important, and I tried to say it in my opening statement but it might not have been clear, is that many investors, people are asking us about -- but you know, we are not really -- we're keen, but we're not that interested in one-off sales.

One thing that we have to understand is that the deployment of UEPS technology in any specific country, medium to long term, allows us to create an infrastructure for money transfers and transactions across borders, regardless of the fact that it was a one-off sale or if it was a recurring revenue sale. That is the first point.

The second point which is important, as happened in Ghana, Brenda immediately went back to the Central Bank to say -- this is great that we have been able and we are able to deploy this technology. But how are the banks going to be able to utilize it to the best advantage without the right level of education, the right level of support?

Which means that we are now officially able to engage any bank that wishes to use Net1 as a company to help them to, for example, implement or target specific portions of the population with specific UEPS products in order for them to generate new revenues.

Which means this is now an opportunity not only to have gone into Ghana, to be able to sell hardware and software, with royalty fees in terms of fees based on, for example, yearly annual license fees; but now to be able to engage banks individually under any form of agreement that we wish to sign. Therefore very possibly be able to get back into their transaction stream.

Now you probably are aware, Dhruv, after many years of working with us, that for every dollar that you sold in technology, $9 is made after the technology. So even a small fraction of a transaction fee by working with individual banks that are going to use the technology in Ghana could generate far more revenue for us than in fact the sales we have made in hardware and software. Let alone, of course, the international money transfers or other across-border transactions.

So we think this is a fantastic breakthrough. From that point of view, I know that Brenda has already been visiting and been visited by other nearby countries such as Liberia, Cote d'Ivoire, and a number of others, which of course have seen what Ghana is doing and are definitely wanting to do the same.

Since the model of outsourcing which I have talked about -- simply because we don't want to continue to bring $4 million, $5 million, $10 million upfront as the barrier to entry in the small countries. We would rather let them outsource everything to us and let them use their $4 million or $5 million to actually go out and implement and market the system, rather than to try to actually operate the technology.

By doing it this way, of course, it will allow us to have a system where we will be taking 5% or 10% of the top line as a transaction fee. In the long term, this is likely to generate far more money than the upfront monies we making today simply after selling hardware and software.

Great, thank you.

Ryan McGaver of Capstone Investments.

Hi, Serge and Herman. How are you? I guess we could briefly revisit the power issues. When the electricity goes out, is it for a couple hours a day, a few days a week? Is it out for a whole day?

It varies, Ryan. The status of the load shedding as they call it -- or the rolling blackouts I think is the more appropriate term -- is determined by the stability of the grid at any given point in time.

At its worst point, which was around two weeks ago, we were at what is termed brown stage 2, which I suppose is like DEFCON 1. At that point in time, there would be up to three outages a day lasting approximately two and a half hours each.

That happened for one or two days. Generally there would be one power failure of two and half or three hours. But I must say, since this has been declared a national emergency and certain measures have been taken, specifically around the mining industry, the power supply situation has improved quite a bit. For the last week or so, specifically at the head office here in Rosebank, we haven't had any power outages.

Okay. Thank you for that. Since Ghana, the hardware sales were almost better than you had expected, should we expect in Q3 for that hardware sales to be lower than in Q2?

Remember that in the hardware sale and software sales segment we include the software portion as well. So out of the total Ghana contract value, initial contract value, for the first phase of around $18 million, we have recognized -- and that is for the hardware, the software, and the customization portions -- we have recognized $6.5 million to date.

So the contributions that you can expect from the third and the fourth quarters, I think, would be equal in size if not slightly higher than what you have seen for Q2.

Okay, and my final question before we jump back into queue, as far as the STC, I realize you have no way of knowing whether or not it will be enacted. Is there a key date we should look for (multiple speakers)?

You mean the complete abolishment of the STC?

Correct, that (multiple speakers).

Yes, the second phase, it is a fairly laborious process that the government has to embark on. It revolves mainly around our Treasury Department renegotiating all of the major international tax treaties, because they are replacing a company-based tax with a shareholder-based tax. Clearly the main issues reside around foreign shareholders.

We understand from the updates that we get provided with every couple of months that that process is well underway, and that they still hope to complete the process to replace STC with a shareholder-based tax towards the end of this year, but most likely in the first quarter of next year.

So, I would say that most probably the best news that we could look forward to or the most accurate that we could look forward to will be in the annual budget speech, which we have on the 20th of February this year. I am sure that the Finance Minister will give us an update on the progress.

I think for a year following that, there is not much that will happen formally.

Okay, thank you; and thanks for the great quarter.

[Mark Brown] of [IM Portfolios].

Good afternoon, guys. Thanks for what you all are doing on behalf of the shareholders. Mine is really a two-part, more philosophical question that centers really on communication with current shareholders and potential shareholders. Of which Serge in your opening comments, you said that we have signed a temporary agreement with Indonesia right now; and that is a prime example.

If we have done that, why have we not made a press release with details of that temporary agreement and maybe outlines for the plans, timetable, and so forth for moving from a temporary agreement to a contract?

That is a very, very good question, and I will try to answer that the best I can. We have been called many things, and one thing that we have not been called is that we are not the type of company that tends to announce anything until we are very, very sure that in fact it will happen, and until we have a very clear understanding of what it will mean.

In other words, when we look at Indonesia -- and Indonesia as you know is a very large country with a huge potential -- what we wanted to make sure, because of the uncertainty around this new type of contractual makeup that we're [there] to enter into, which really is very different to the type of thing we signed in the past, where we have to basically [enter a type] in terms of a risk/reward scenario.

We are busy quantifying that risk/reward scenario and we are busy also looking at the time frame for what Brenda has already agreed in Indonesia, namely the installation of our first pilot in one of the islands, which we believe we can probably do very, very quickly. But that purely would demonstrate a working system.

So I think what Herman will be doing over the next couple of weeks or couple of months is certainly to try to formulate something a little bit more exact in terms of where we are in the first phase; and what the second or third stage of Indonesia could look like, assuming that the first phase actually happens.

So you're right; maybe we have been told that maybe we do not give our investors enough information. We tend to agree with that, simply because we have been informed that perhaps it is better not to say too much rather than too little.

You know that we have now hired a new IR executive, and we are hoping that as he is now more au-fait with the Company, the people in the Company, and what do, that he is going to start giving almost week-by-week sort of blows in terms of each business unit.

Not to tell the investor on a day-to-day basis that we're going to make another $0.12; but at least to update you all in terms of the progress which has been made -- which unfortunately, none of the investors seem to know about. But unfortunately for the people that work in Net1 have generated for them a huge amount of work and effort.

I think we need to be able to be a little better in conveying the type of effort that has been conducted by the people, without creating an expectation as these certain things are for sure.

It's always this dilemma that we have got to manage, and we have always been a little cautious. But perhaps we are a little too cautious.

Yes, let me encourage you at least on the opposite side of that; and I respect the legal community. But I respect the way you guys run the Company, and I would encourage you to run it from your head and your gut more than from the legal community.

The second part of my question would be from -- you were talking about the developing reputation of our Company. Do we have a strategy? Because we get news from you guys once a quarter and that is about it. The analyst community is either quiet or nonexistent.

Do we have a strategy for any more communication from the financial sector or to the financial sector, to inform people more even just about the Company?

Again, very, very, very valid point. I can assure you that at in fact our last Board meeting, which was only a few days ago, that is something that has come about again. I think as we have been listed now, for I think it is almost three years, is it? (multiple speakers) Is it four years? Three and half years?

To be quite honest, I must take some of the blame, because we are conservative. But I think we are starting to understand the difference between the legal requirements or compliance requirements in the US and NASDAQ; and also what both retail and long-term investors and hedge funds actually expect us to say.

It has taken us a while to having [get] this balance. I can assure you that you will see something changing, very much in the short term, and that we have beefed up that area of the Company. Because we do intend to start telling people a little bit more about what we do and certainly why we do it.

I think everybody actually deserves to know. And candidly, our own people internally deserve to get that recognition. So I can only give you my apologies for having had it done in the past. But we understand this a little bit better. We know it is needed, and we are going to do it.

Serge, and I will step out of line and let somebody ask questions, and I appreciate that. Let me -- you drew the differentiation between retail investors and long-term investors.

I have been and have clients that have been investing in this Company for five years. As I look at the turnover in institutional investors, I think it may be just opposite from what that you're actually inferring. Thanks a lot, guys.

Thank you very much for that. We appreciate it.

Dave Koning of Baird.

First of all, thanks for all the detailed disclosures again in the 10-Q.

One that I thought was of particular interest, the first time you kind of broke out Colombia, and just showed how well, once you get something going, you can really ramp it. I think in September you had 10,000 transactions; and by December you already close to 30,000 transactions.

I guess on that contract I am wondering, you are still in a little bit of a loss mode given it is early. How many transactions do you think you will get to on kind of a normalized run rate, first of all per month?

Secondly, where do we need to be to breakeven? Then what could long-term profits be in that subsegment?

Again a good question. We are getting one of our financial guys to quickly look this up for you. Because as you know, at the moment it is a fairly small part of our business. But I think you have picked up on something which is very important.

You know, when we ramp up something like for example a Colombia or a Vietnam -- and candidly, the two of them are very similar. You have picked on the fact that now that we have gotten the technologies bedded down, and we have got the right players -- I know for example in Colombia we were [looking] I think it was the fifth-largest cellular phone or the third-largest cellular phone operator. We have now signed the biggest cellular phone operator.

Memorandum of under --

In terms of an MOU. But it always starts with an MOU. Now, the bottom line is that if you look at the population, of course in Colombia, which is probably about the same size as South Africa, okay?

And you look at, for example, the size or the amount of transaction that comes through South Africa in terms of prepaid, we are basically very much at the very beginning of what could be an exponential curve.

So there is no doubt that that business in its own right -- and I can name one business in South Africa called Blue Label that is in this business, or at least of selling airtime, that they have listed on the stock exchange. And actually their market caps around what? 2.5, 4?

4 billion.

ZAR4 billion. So, we believe that each one of these businesses that is running VTU has the potential to grow to at least that size.

We must also understand, however, that the intention of using VTU for us was always the foot in the door. That as soon as VTUs start operating is to bring in the UEPS technology as, for lack of a better word, the second wave of attack on that customer base.

So I think you have picked on something, both Colombia and Vietnam, which is no doubt.

And I think -- thank you for telling us we are good at this; but I think we are good at this. That we can actually, when we set our mind to something, we actually can make it happen. We are very good at breaking the barriers, if there are any barriers in our way.

So yes, this is going to be (inaudible) two exciting projects. The breakeven, and I think have we gut numbers? (multiple speakers) Breakeven? No. Unfortunately, I'm not going to lie to you, we have not at this point in time worked out the breakeven point.

But in my view if you look at the numbers that have been calculated, our spending at the moment in this particular company is actually not that high. I think we are talking about what, $100,000 a month. So it's about fully staffed $100,000 a month.

Which means it is not going to take long before we start actually breaking even and start making positive, actual profit. So I'm very comfortable that during this financial year 2008, I will be very surprised if that curve is not turned, specifically at the growth rate we are experiencing at the moment.

Great, that is very helpful. Thank you. Secondly, on Ghana, just what do you expect your hardware-software revs to be in the first half of '09? Because that was a nice disclosure as well, that that contract will generate additional incremental revenue in the first half of '09. So maybe you can just give us that.

Then secondly on Ghana, what is the ongoing revenue, the recurring kind of piece on the 2 million cards as well?

Again, it is a good point. In Ghana, remember that we have gotten some further orders as it is. I think the initial contract value was around, I think, $27 million or $28 billion.

That includes the recurring.

Okay, which includes the recurring piece. That has gone up again by a couple of million dollars. It is probably around the $30 million mark now.

Now, we expect the presidential launch to occur during the first couple of weeks in April. That is when they have planned it. It might be a couple of weeks later, but it doesn't really matter.

Which means the systems' Phase 1 must be implemented. We are expecting towards the end of May-June certainly to have already a lot of the cards to have been issued. That is going to depend very much on the ability of the financial institutions to register 2 million people, which is not quite a simple as, I think, what everybody thinks.

So in my view, because of the way that we recognize revenue in Ghana, I think we have chosen a method which is percentage based. In other words, it is percentage completion. That over the next two quarters -- and when I say two quarters we are talking about third and fourth quarter -- we probably found that we will probably recognize around, what? 60% to 70% of that (multiple speakers).

Well, on the software side (multiple speakers).

Specifically on the software side, that will be; and that is the high-margin business. The remaining will probably happen in the third or the first quarter of next year, of 2009.

By then, I think you will have seen even further orders in Ghana for ATMs, for cards, that are also going I think to beef up our second-quarter 2009. Of course, at that stage we are also going to start getting revenues coming in from what we call annual revenues.

So it is both maintenance, which is quite a high maintenance charged per annum, on the total package. I think it is around 12% to 12.5% in some cases, which can bring in easily $1 million, $1.5 million. And of course, we have also got card-based royalties, which is a fixed fee per card that we are also be going to getting on an annual basis in terms of recurring revenue apart from hardware sales.

So, I have always estimated that when the system starts running -- and assuming it runs as well as it looks -- we should be able to generate $3 million to $4 million a year just in what I would call ongoing sales, as well as simple card-based transactions in terms of license fees and maintenance.

The exciting pieces, however, I think will come in the next six months, when we start working with individual financial institutions and doing side deals in terms of assisting them to actually now use the technology and adapt the technology for them to the products they wish to sell. Then, I think, we will have the ability to actually build ourselves into the transaction fee.

So I think Ghana in its own right is going to be very good for the next year, for our next financial year, regardless of how you look at it. But certainly towards the third, fourth quarter of 2009 and onwards, I think it will generate some nice revenue at the bottom line, minimum of $0.07, $0.08, $0.09 per annum as a minimum. Plus whatever additional revenue we will make after signing side deals with a potential 150-odd financial institutions.

Great, thanks for all that detail. If I might just have one final question. In South Africa you mentioned that you're starting to attempt to sell into the unions and some employers. I am wondering, when would you expect kind of the first real card sales and the first revenues to really start coming in? Maybe six to 12 months? How many cards do you kind of expect early on?

You know, once again this is a question that everybody asks, and I wish we could predict the entire future. But I can only tell you what we are attempting to do. It doesn't necessarily mean we will do it, although we are pretty good normally at doing what we say we're going to do.

We made the call that there was no point -- once we had proven the technology and the fact that people wanted it -- to try to continue to market or to sell UEPS to individual people. It would take far too long; and candidly, we would become like a bank, whereby we would simply try to advertise and pay millions of dollars in advertising hoping that somebody would knock on the door and sign, and say, please can I open an account?

We decided the only way to do that is by going through organizations that already today service for whatever reason millions of customers. We have got these organizations. We are in the final steps of signing some exclusivity deals with a lot of them. And a lot of them see a huge amount of value to work with us, simply because we do not compete with what they do today, but we can [on-sell] their own product.

So these organizations vary in terms of numbers of customers from 350,000 down to about 2.7 million to 2.8 million. Now if we can simply engage one or two of those, of which we have four big ones, to actually start selling directly to end-users themselves, and also the organization they are going to sell to employers, we feel quite confident, as Herman has mentioned, that we should be able to pick up our first 1 million customers very, very quickly indeed.

I think Herman mentioned three years, but that is because he is a chartered accountant and that is because, as an accountant, he is obviously very pessimistic and very cautious.

I would be certainly disappointed if we only managed to sell 1 million people over the next three years. In my view, that would mean that something in our plan did not work. And we are not going to wait three years waiting for it not to work. If we see it is not working, we are going to adapt the plan where we believe we know that we can actually accelerate this penetration.

That's great. Thank you so much.

Absolute pleasure.

David Pickering of Noonday Asset Management.

Serge, I think you said in your opening comments that the reasons given by SASSA for the extension request were less than clear, or not as clear as you would have liked. Perhaps you could just elaborate on, what do you mean by that?

Well, to be quite honest, the reason why I said that is because I had forgotten exactly the wording they had given us in the letter. I think their wording was due to --

Unforeseen.

Unforeseen circumstances. In my view, you know, if were to say to you -- due to unforeseen circumstances I will not be able to make my target by 20%, I don't think you would necessarily think that I am being very, very clear.

So, we -- and I think if you look or if you try to remember, what I did mention is that we believe, firmly believe, that the change in the national executive of the ANC, whereby a new set of people are going to come in and are going to become the people that basically run the party, we believe that there has to be a fairly major handover between the existing government officials and basically the new incumbents.

We firmly believe that that in itself has actually slowed down if not arrested the process until that negotiation on that handover will take place.

So, we think it is no more difficult than that; and that is why I have always said, if this thing does not happen before Christmas or before the 15th of December, in my view I always said it wasn't going to happen at all. Simply because this thing could be now delayed until in fact the new election in 2009, whereby another tender could then go out after that.

Now, I am still reasonably confident about what we are hearing, that there is a good chance that they might still decide -- even if they give an extension -- to actually award the tender before the end of March of 2008. But they will only do this once I think the handover has taken place and both sides agree with each other in terms of the way forward.

If they do not, nothing is going to happen until the new government of 2009. But of course, this is entirely my speculation, and I am not a politician.

Not yet. Thanks, Serge.

[Peter Buhawa] of Matrix Capital.

Morning, Serge. Morning, Herman. I just had a quick question. In the last conference call you alluded to a trip that Brenda was making to Dubai. Just wondering if there is anything interesting happening in that region as well, if there is any update.

You are right, Brenda did make the trip to Dubai, because I would not allow her to go to the actual destination country at this point in time. There is absolutely no doubt that that is moving very, very well. We expect -- in fact, I think I did put the wording in my initial opening. And we still feel very, very confident that that certainly, and specifically a country like Iraq, will be a country that I think mentally have decided that they would like to use our technology. Because it would solve a lot of their problems.

I know that Brenda has been working very, very hard between our attorneys and the ones from Iraq to actually finalized these agreements. I think this could be one of -- in fact, a deal in my view that if it comes about, will be even far better than the one that we did in Ghana.

So let's touch wood enough that that happens sooner rather than later.

Great, any sort of skeleton details on the business model? Or is it too early?

It is a little too early, but it will certainly not be the sale of technology as you have seen it in Ghana. It is going to be based on rather an outsourcing agreement with some sort of percentage top line that we will be taking for our efforts.

So I think it's going to be something a little safer for us. At the same time I think long term it will be something more lucrative. But it will be a little less money upfront.

So right now I would rather go for the medium- to long-term benefit in terms of recurring revenue rather than the initial hit, which is very nice to take as well, but very often you [count above].

Great, thanks, and congrats on a great quarter.

Thank you, Peter.

Dr. Belamant, there are no further questions. Would you like to make any concluding remarks?

Yes, I think at this point I would just like to say thank you very, very much to all of the investors and all of our shareholders.

It is great to know that a lot of you still very much believe in what we do. We certainly do, and we think that every month every [bit] of new contract, or every new technology that we put out I think positions us to become certainly one of the leading payment systems in the world.

Hopefully we still believe strongly that we can become a world standard in payment systems, specifically for developing economies. I really believe it. I really believe they need it. And I really believe candidly today there is no one else that can do it.

So, for all it is worth, I hope you all have a wonderful either afternoon or wonderful morning. Thank you very much for attending.

Thank you. On behalf of Net1, that concludes today's conference. Thank you for joining us. You may now disconnect your lines.