Lesaka Technologies Inc (LSAK) 2008 Q3 法說會逐字稿

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

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

Thank you. Good morning to our investors in the US, and good afternoon to our investors in Europe, and to those in South Africa. Thank you very much for joining us for our third quarter fiscal 2008 earnings call. With me today as usual is Herman Kotze, our CFO, and I also have with me a number of our senior management team.

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. We're required by these rules -- we have provided a reconciliation of the non-GAAP measures to the more directly comparable GAAP measures as exhibits in the press release dated yesterday.

As mentioned on our previous call, it has become apparent to Herman and I that our previous practice of presenting our results in US dollars which is GAAP, and South African rand which is non-GAAP, is confusing. Therefore, based on the requests and recommendation of our investors and analysts, during this call we will primarily discuss our result in South African rands, which is a non-GAAP measure.

We analyzed our results of operation in annual report on Form 10-K, our latest 10-Q, and in our press release in South African rands, to assist investors in understanding the changes in the real underlying trends of our business.

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

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

Regardless of the weakness of the rand, I am once again delighted to report another set of numbers that have exceeded our expectations. Our operations have continued to deliver solid financial results and cash flows, and we remain firmly on track to achieve or exceed our targeted growth rate for the current fiscal year.

In analyzing these results, we provide additional non-GAAP measurement, namely fundamental net income and fundamental earnings per share. That eliminates among other adjustments a significant non-cash accounting increase required by GAAP specifically for the Prism acquisition.

On this basis, we recorded an increase in fundamental net income of 22% from ZAR139.3 million for the three months ended March 31, 2007 to ZAR170.5 million for the three months ended March 31, 2008, and an increase in fundamental earnings per share of 22% to ZAR2.98 for the three months ended March 31, 2008.

Our GAAP results in comparison would reflect a 52% increase in net income and a 51% increase in EPS, certainly our best result for any quarter to date.

I'm also pleased to report that the company is, in my view, performing above my expectations when measured against the various goals that were set at the beginning of the financial year. These goals, of course, included first and foremost our EPS growth, our cash conversion ratio, the quality of our earnings, the selection of sustainable business deals, meaningful market penetration, technological robustness, technological innovation, our new M&A program, our investment in social programs, and the structuring and restructuring of the company to meet our worldwide objectives and ambitions.

At this point, I would like to take a step back to reiterate to all our shareholders the vision of Net1, and how we convert this vision into strategy and action, and to focus on those deliverables rather than on the financial numbers themselves. These have been set out in detail in our latest 10-Q, and Herman will present them in detail later.

Our core competence as a technology group is to provide a multi-platform secure payment and transacting processing system for environments that are not suited to first world solutions. We have consciously chosen to follow this route as we believe that we have a huge competitive advantage in this arena for a number of reasons, including our experience as operators in these environments, our technology core solutions and innovations which allow entire countries to leapfrog existing technology core platforms, the cost effectiveness of our solutions, the equitability of our business models, our broader understanding of the complexities present in these environments, and our acceptance and support of the specific socioeconomic and sociopolitical environments that we target.

We also understand that working with and being part of such dramatic change in business, technological and social concepts can, on occasion, lead to timelines which are longer than anticipated, or not in line with first world expectations, as we are always rescheduling projects, reprioritizing initiatives and developments to ensure that we are neither too early, nor too late, to seize a specific market opportunity.

Our penetration can be greatly affected by election programs, budget approvals, market readiness, and many other factors which we have to manage at any one point in time. We therefore ensure that we always have a number of opportunities which appear to be in the most ready state, and others which are waiting on the wing.

It often happens that some of these opportunities do not always materialize during the timeframes defined. These opportunities do not go away but have simply swapped priority with others which are in a more ready state.

We continuously monitor and manage our pipeline to ensure that we will continue to deliver our projected earnings growth whilst not entering into short term deals which are neither sustainable, nor in line with our strategic vision.

Let me now update you on some of our initiatives. Firstly, a number of our investors have asked us to give some color on the latest SASSA press release. It must be noted that this tender is the second largest tender ever issued in South Africa. The value of this tender over a period of five years, which is the average legal length of these type of tenders, is in the region of $2 billion. There is therefore no doubt that many organizations are punting for this business.

Government is, therefore, being prudent by ensuring that the tender process has been followed correctly. These deliberations, however, point us to the fact that it is their intention to award this tender in the near term.

We reiterate that we feel that we have a better chance than most of winning this tender as a whole, or to be put in a position which is better than our existing one. Our track record, financial portfolio, technological solution and [our B] and social development programs is, in our view, unlikely to be matched by any one of our competitors.

Secondly, let me update you all on our Ghanaian initiative. The Ghanaian contract was signed on June 15, 2007 for the implementation of a national switch which they've now branded e-zwich. Net1 was awarded this entire contract as an end-to-end solution. Over 42 companies actually tendered against us during this tendering process.

The initial orders which were placed to show the size of this tender exceeded 500,000 cards, 5,000 point of sale terminals, two Stratus servers, which are our largest computer -- back-end computer systems, production and call center hardware and software, our UEPS banking application, our UEPS mobile banking application, debit and credit card switching software, integration to 24 banks, and the additional bank of what they call Apex Bank, which is responsible for in excess of 120 local community banks.

The official launch of e-zwich by the President of Ghana took place on Monday, April 20, 2008 at the State Theatre in Accra. More than 800 delegates from Ghana attended the launch. Successful live implementation was performed in five leading banks in Ghana, Zenith Bank, Trust Bank, Fidelity Bank, Guaranty Trust Bank, and Merchant Bank.

The Central Bank pilot plan is to monitor these five banks for a period of one month, then to allow a further five banks for another month. By July, we anticipate participation from all banks to have taken place. Each pilot bank can then sign up and acquire a maximum of 50 merchants for the first month pilot period, and Net1 teams are all on standby to assist with this massive rollout.

Phase two of implementation has already commenced. And here we are talking about integration of the ATM network system. Our [12 map], which is our one-to-many search engine biometric search station, offline settlement, as well as of course offline card registration. New orders have already been placed in excess of the original ones. In December and January of 2008, another 2,000 point of sale devices were purchased, and an additional 1.5 million cards were purchased, 810 registration devices, and 254 wage payment workstations.

Furthermore, further orders were placed in February and April as more banks joined the system. A further 1 million cards were ordered. A further 3,500 point of sale devices, another 528 registration stations, and another 76 wage payment stations, as well as some personalization equipment.

It is clear looking at these results that our Ghanaian implementation has been incredibly successful, and has been completely backed in its entirety by the Central Bank of Ghana, as well as the people that work in it.

Once again, this project demonstrates the power of our teams, our sales force and technological solutions. We certainly believe that due to this Ghanaian project, we will be able to implement other such like projects in many other African and Middle East countries.

If I now turn my attention to another launch that was performed during this quarter, and that of course includes the launch in Iraq. Our contract in Iraq was signed on February 25, 2008. The project has commenced, and is on target for implementation in Baghdad during June for live registration, and July for the commencement of war victims and [martyrdom] grants. An initial amount of 100,000 cards will be utilized for the initial pilot project and allocated for the various projects as stipulated below.

If successful, a further 900,000 beneficiaries will be paid [the other] UEPS, totaling 1 million in respect of government grants. The pilot will include 70,000 war victims, 10,000 martyrdom and 20,000 employees' salaries and wages split between Al-Rashid and Al-Rafidain Bank. Our initial orders included 100,000 cards, 100 point of sale devices, 50 cash dispensers, and a number of registration stations.

The terms and conditions of these contracts are somewhat different to our traditional businesses in which we sometimes have equity. In this particular case, our fees are 10% of the value of each transaction, 10% of the top line. We also get paid quarterly license fees at $0.29 per card, and we also get $1 per card when we perform any biometric search. We also receive monthly processing fees of $25,000 per month.

At the moment, the [Iraqis] have committed to putting out in excess of 1 million cards during the first six to nine months, 3 million cards in year two, and 5 million cards in year three. This is of course cumulative which we could expect to have up to 5 million cards within three years.

This project once again demonstrates our ability to be able to enter a new country and to immediately, over a very short period of time, to provide this country with solutions which you have been searching for, for many, many years.

A word of thanks at this point in time for the huge effort that has been made by our sales, technical and business teams, all led by Senior Vice President in marketing and sales, Brenda Stewart, present with us today, that have taken huge amount of their time to spend in these different countries to teach, implement, change ideas, modify people's thinking, and assure that at the end of the day the UEPS becomes the payment instrument of choice in the developing economies of this world.

If I now focus on a number of other countries in which we are already present, Namibia, Botswana and Nigeria, I will be pleased to report that Namibia is the country which is now signing up deals at the much faster rate with sometimes governments, and sometimes the public sector, and is starting to now generate some profits.

Our Botswana initiative, which was a little slow to kick off, has just signed a government deal for 100,000 people to pay 100,000 grants on a monthly basis, and that by itself will make our Botswanian venture profitable.

Our Nigerian initiative is also commencing to show a little bit more activity with Diamond Bank that have commenced the implementation of their first project, but because of what is happening in Ghana, we are now being approached by similar banks, or in fact banks with branches in Ghana that are Nigerian banks, that are now wishing to actually drain the Nigerian switch as they believe that Nigeria is lucky to follow in the tracks of Ghana.

We must also note that the tender that had been cancelled vis-a-vis the national IT system in Nigeria, has just been reissued and, of course, it is our intention to follow this up and to tender directly for this particular business, reinitiating the potential that we had all seen and perceived to be present in the Nigerian continent -- in the Nigerian country.

When we look at countries like Columbia, you will see in our press releases that our systems are now starting to generate good income, but more importantly are starting to actually grab a large chunk of the production market. We believe that in a short while this business will become profitable, and will then be able to expand its activity into a fully fledged UEPS system, once again, using prepaid cell phones as an entry to generate customer acquisition, and to then allow these particular customers to make use of the full UEPS functionality.

All in all, I hope that the above will assist you all to understand a little better our modus operandi. I am also excited to add that at last, our wage payment system in South Africa is about to be launched; in fact, Monday at 4 pm in the region of KwaZulu-Natal. We are now able to utilize our [Version] (inaudible) technology that has been implemented successfully in Ghana. We are able to have a full access to a banking license, and we have now [securized] a number of financial products which are going to be launched as part and parcel of our offering. I'm excited at our progress and that we continue to be able to deliver the growth that we have managed to achieve for such a long time.

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

Thank you, Serge, and greetings to our investors around the world. I will discuss the key trends of the (technical difficulty) quarter fiscal 2008 compared to the third quarter of fiscal 2007, along with the key trends between the third and the second 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 the analysts.

Again, for clarification purposes , I would like to mention that my following discussion will be based on our results in South African rand as this provides the best indicator of the Group's actual operational performance, and this is a non-GAAP measure. In order to review our results in terms of US dollars and US GAAP, please review our quarterly filing on form 10-Q as well as our press release filed yesterday.

For Q3 of 2008, our average rand dollar exchange rate was 7.41 compared to 7.21 for Q3 of fiscal 2007. And sequentially, from the second quarter, we saw significant weakening from a fixed [rand in the eight] to the dollar level for Q2 of fiscal 2008.

Looking at the current situation, the rand has strengthened against the US dollar during the second half of our current quarter in Q4, somewhat high at about ZAR8 to the dollar during the last weeks of Q3, and it is currently trading at around ZAR7.60 to the dollar. Any fluctuation of the rand obviously influences the dollar equivalent results of our (inaudible) operation, which is why we provide you with constant currency information in our press release and on this call, as the core operational drivers are clearly visible from these numbers.

I am impressed with our first quarter results as we have again achieved record earnings, and we have met or exceeded my key financial indicators of continued fundamental earnings growth, strong operating margins, and fantastic cash conversion. Before I continue further with the discussion of our results, I would like to discuss two key factors that I believe have affected the comparability of our results.

The first factor is the enactment of the legislation to change the rate of Secondary Tax on Companies in South Africa, or STC, from 12.5% to 10%. This change has resulted in a decrease in our fully distributed tax rate from 35.45% from the 36.89% during Q3 of 2008. In terms of US GAAP, we had to adjust our net deferred tax liability to reflect the new rate, which resulted in the reduction of our income tax expense, and by implication, increased our net income by approximately $5.9 million during this quarter. The adjustment in this quarter resulted in an overall effective tax rate of 15.9%, which will obviously revert to the new rate of around 35.45% going forward, excluding any (inaudible).

The change in the tax rate does not affect our revenues and operating income numbers. In addition, our fundamental net income and earnings per share excludes this positive impact of the change in the tax rate as we view this event as a non-routine transaction which goes on ad hoc basis.

The second factor affecting the comparability of our results is the receipt of the large settlement payment from SASSA last year during the third quarter of 2007. Last year, this payment received contributed to an increase in our net income of approximately $4 million, and increased our earnings per share then by [$4.4].

We discussed this payment at length on the Q3 2007 earnings call, and again, I would like to reiterate my belief that it would be incorrect to exclude this amount from our comparable fundamental net income and earnings per share on the basis of it's large infrequent nature, as payments like these related to contract, cost and pricing adjustment of one of our core activities and are no different from any of our many other non-recurring revenues such as hardware and software sales that are not specifically excluded from the calculation of fundamental earnings per share.

We indicated during the earnings call last year that the settlement payments we have received constituted of recurring and non-recurring elements in order to facilitate a meaningful comparison and interpretation of the trade in our recurring transaction based activity.

In last night's earnings press release, we specifically included attachments C and D to provide you with a comprehensive analysis and comparison of the recurring and non-recurring items facilitated with the payment received last year.

Accordingly, I believe that my following discussion describing the movement in our revenue and operating income for the Group, and our transactions of operating segments, will be most meaningful if we exclude the non-recurring portion of the settlement payment received from SASSA in Q3 2007.

Revenue for our current quarter was ZAR467.4 million, up 17% year-over-year. Our gross margin was 74% compared to 75% the same quarter last year, and 71% compared to our preceding quarter. 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 17% year-over-year and by 11% quarter-on-quarter. The overall operating margin compared to last year was the same at 45%. Sequentially, operating margin increased from the 41% in Q2, mainly as a result of the inclusion of more high-margin software development revenue, and increased margins from all of our operating segments due to improved trading conditions.

Let's now analyze the business in more detail using our reported segment.

Our transaction based activity segment increased revenues year-over-year by 9%, and sequentially by 2%. Our operating income was static compared to the previous year, but improved by 4% to ZAR150.8 million for this quarter. Our operating margin improved to 55% from 53% in Q2 this year compared to the 60% of Q3 last year, mainly as a result of the following three factors. And this is why there has been a reduction in the operating margin from last year.

One, a rapid increase in the South African inflation rate over the last year has resulted in inflationary increases in our cost components that were higher than the increase that we negotiated with our customers. Two, lower revenues earned during Q3 2008 compared to the Q3 2007 period, which resulted from the opening in March 2008, of the April 2008 [profile] in all provinces except KwaZulu-Natal, whereas in March 2007, the April 2007 profile was opened in all provinces. And three, lower margins at EasyPay, mainly as a result of a comprehensive overhaul of the operational and technical platforms.

These profit margin decreases were partially offset by the increased revenues from annual price increases received for welfare distribution and administration services. The price increases from our [wealth] payment contracts are regulated by the various [service able] 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, in other words, for as long as the new tender award is delayed. We will continue to show strong and robust growth from this business through the combination of price increases, growth in the number of beneficiaries, and the continued migration of our beneficiaries to our merchant acquiring network.

The total number of payments processed to beneficiaries increased from 11.41 million for Q3 2007 to 11.89 million during the current quarter, which is an increase of 4%. Sequentially, the total number of payments processed to beneficiaries does not increase as the gain in new beneficiary transfers was offset by the much publicized removal of beneficiaries following a lengthy investigation by SASSA facilitated by ourselves into the eligibility of certain grant recipients.

On January 29 this year, the Minister of Social Development announced that 288,682 beneficiaries had been removed for the social welfare system. We estimate that 110,000 of these beneficiaries were previously included in the profiles we received from SASSA. Looking forward, we believe that the growth rate in beneficiaries will resume based on the following reasons. One, we expect to complete the transfer of beneficiaries from the Post Office to ourselves in the North West province by the end of June, which will result in an estimated increase of another 70,000 beneficiaries [based] in this province.

Two, on March 17, the Minister of Social Development announced that there will be a review of the means test undertaken to ascertain eligibility for social grants to ensure that the many South Africans who are currently excluded from the social welfare system as a result of outdated evaluation criteria are included in the future. The Minister mentioned that the efforts to eliminate fraudulent grants, as we spoke about before, had resulted in additional available funds which should be distributed to those who are most in need.

And three, on April 20, the Minister of Social Development reacted to a court order that requires the granting of social grants to applicants who were previous denied due to the lack of adequate identification documents and birth certificates. The Minister indicated that SASSA would implement the court order as a matter of urgency and that specific emphasis will be placed on the redesign of the information technology systems at the same time.

During Q3 2008, our merchant acquiring system continued its impressive performance as we processed a total of ZAR2.02 billion in transactions through our merchant acquiring network compared to ZAR1.63 billion during Q3 of 2007, and ZAR1.87 billion during the preceding quarter all on a completed pay cycle basis.

The productivity of our installed terminal base of 4,222 terminals increased to 953 transactions processed per terminal during the second quarter, completed pay cycle, compared to 807 during Q3 of last year, and 851 during Q2 of fiscal 2008. Those increased throughputs from the comparable period in fiscal 2007 demonstrates the continued rapid acceptance rate of our court order 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 Q3 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.

Please note that we are the only service provider capable of offering this very convenient service at [merchant], which we believe is a key strength of our continued offering. During the current quarter, EasyPay processed 129.2 million transactions with an approximate value of ZAR28.1 billion compared with 108.8 million transactions processed with an approximate value of ZAR24.3 billion during Q3 of 2007, and 135.3 million transactions processed with an approximate value of ZAR30.3 billion during the preceding quarter.

Due to the early Easter public holidays in South Africa this year, which typically result in increased consumer spending, we experienced an increase in the number of transactions processed through the retailers during the third quarter of 2008 compared to the third quarter in 2007. Accordingly, due to this year's timing of the Easter holidays, we expect the number of transactions processed during Q4 2008 to be slightly lower than those during Q3 2008. The average fee per transaction during the second and third quarter of 2008 was approximately ZAR0.20. We do not expect a significant fluctuation in South African rand in the average fee per transaction during our next quarter.

EasyPay's operating margin, excluding these fixed and intangible amortizations, was 34% for Q3 of 2008 compared to 45% for Q3 of 2007, and [53%] for Q2 of 2008. Our operating income margin at EasyPay has decreased as a result of costs incurred related to the implementation of a new integrated switch and operating platform which we expect will improve operating efficiencies and reduce costs at EasyPay. Once completed, we expect the new integrated switch to greatly enhance our offering at EasyPay and enable us to take advantage of the new business opportunity. We expect the new integrated switch to be at full operating capacity during the first quarter of 2009.

Our smart card account segment has revenues are ZAR64.5 million for Q2 -- Q3 of 2008, which is an increase of 3% year-over-year. The total number of active smart card accounts increased by 4% from ZAR3.8 million during Q3 2007 to ZAR4 million during Q3 of 2008. Sequentially, there was no significant movement in the number of active smart accounts.

Our financial services business had revenues of ZAR14.8 million for the third quarter of 2008, which is a decrease of 28% compared to Q3 of 2007, and a sequential increase of 2% compared to Q2 of 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 with the National Credit Act.

Revenues from UEPS [based earnings] decreased during Q3 2008 compared to Q3 2007, primarily due to the lower number of loans granted. In addition, on average, the return on these UEPS loans was lower during Q3 2008 compared to Q3 2007.

The final operating segment is our hardware, software and related technology sales segment. This segment traditionally includes revenues that occur on an irregular once-off basis and it can be difficult to predict sales from year-to-year. This segment includes the sales of UEPS related hardware and software, as well as the sales of subscriber identity modules or SIM cards, cryptography services and SIM card licenses. The segment had revenues of ZAR112 million for Q3 of 2008, which is an increase of 77% year-over-year, mainly as a result of the delivery of hardware, and 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 $4.3 million during Q3. To date, we have recognized revenue amounting to $10.8 million, relating to the Ghana contract.

As mentioned by Serge earlier, e-zwich was officially launched in Ghana in April, and we expect to complete the initial installation and customization of this system during Q4. We anticipate that the initial contract phase will have an overall value of $17.4 million. The operating margin of this segment increased from 11% for Q3 2007 to 36% in Q3 2008, mainly as a result of the high margin software deliveries to Ghana, terminal sales to our bank customers in Africa, and improved trading conditions in [eastern] markets.

As discussed previously, the reduction in the STC rate was enacted during Q3 of 2008, which resulted in an effective tax rate for Q3 of 2008 of 15.9% compared to 38.2% for the third quarter of 2007, and 36.7% for the second quarter of 2008. As previously announced, on February 20, 2008, the Finance Minister of South Africa announced another decrease in the statutory rate of taxation for South African domiciled companies from 29% to 28% for all fiscal years ending on or after April 1, 2008.

Once enacted, our fully distributed tax rate will be further reduced from the current rate of 35.45% to 34.55% for our South African domiciled subsidiary. Of course, when STC is abolished, as expected next year, our effective tax rate for the South African operations will decrease to 28%.

We have illustrated our interpretation of the potential effects of the abolishment of STC in question 21 of the frequently asked questions section, or attachment E of our press release.

I am very happy with the progress made by our equity accounted investments in Namibia, Botswana, Columbia and Vietnam. These fledging businesses continue to grow, and that certainly indicates they all have exciting prospects in terms of business development.

On a GAAP basis, our quarterly net income of ZAR199.9 million represents an increase of 52% year-over-year, and GAAP earnings per share increased by 51% on a constant currency basis. On the same basis, fundamental earnings per share for Q3 of 2008 increased by 21% compared to Q3 of 2007.

Before turning to our balance sheet, I would again like to mention that our cash provided by operating activities can and does fluctuate significantly as a result of the signing for the commencement of our monthly welfare payment activities, specifically through merchant stores. As a general rule, however, we expect 100% or more cash conversion ratio over any completed pay cycle period.

Now turning to our balance sheet, as of March 31, 2008, we had $235.6 million of cash and cash equivalent. 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.

As I've stated before, I view the balance sheet item called pre-funded social welfare grants receivable as a highly liquid, very short term receivable best described as a near-cash equivalent. We had $24.3 million of pre-funding outstanding at the end of March.

The decrease in our accounts receivable compared with June 30, 2007, is largely due to all provincial governments paying out the amount outstanding before March 31, 2008. Our other payable amounts due to merchants. The increase is primarily due to merchants receiving settlement of the grants distributed in the last day of Q3 2008 during the first days of Q4 2008.

Our deferred income tax liabilities have decreased significantly, mainly as a result of the reduction in our fully distributed tax rate during the third quarter.

As discussed in question 20 of the frequently asked questions section of our press release, we believe it most appropriate at this point in time to retain our cash reserves to finance the expansion of the business, to reduce the significant costs of our current and possible future pre-funding of welfare grant obligations, and to execute relevant acquisition opportunities. Overall, the quality of our earnings and financial strength, as reflected by our balance sheet, be a testimony to the Group's activity and our ongoing achievements. Based on the assumption that our current business activities and initiatives will continue as usual, we expect to comfortably meet our fundamental earnings per share target on a constant currency basis for fiscal 2008.

I want to reiterate that regardless of prevailing market conditions, market sector [sentiment], and inherent or implied uncertainties, we will continue to focus on those activities and opportunities that will result in the profitable expansion of our brand, business and products.

We believe that our tangible earnings track record and operational successes far outweigh any intangible concerns about the future success of our business.

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

Thank you very much, sir. (OPERATOR INSTRUCTIONS). Our first question comes from Dave Koning of Robert W. Baird. Please go ahead.

Yes; hi, guys, and thanks for all the detail on the call.

Hi, Dave.

Yes. I guess first of all in Ghana, you talked about this year ZAR17 million or so of hardware, software implementation type revenues, and then you talked about for the first time another ZAR5 million of revenue coming on in fiscal '09, but I'm wondering in addition to that you talked about some of the cards, the 2.5 million cards, etc. Are we in a situation fiscal '09 where we actually could get up to the same amount of revenue in fiscal '09 as we did in fiscal '08 based on some of the cards, etc. coming up?

It's Serge here. I've got Brenda with me and obviously we've been discussing this. There are two aspects that we've got to try to understand. I think at the moment, if you look at the total amount of cards that have been purchased, it's already in excess of 3 million. The Ghanaian population is 22 million. So we believe that at the moment at the rate that the banks are actually coming onboard, the chances are is that we're going to see, in my view, the number of cards growing to perhaps around 6 million mark before the market will reach the stage which, I wouldn't call it saturation, but it will reach a mature stage.

So we believe that as long as the project continues to go on track as it is going now, we don't see any reason why the next 12 months should not see a similar sort of a month of cards being bought as what's been bought to date.

Sorry, Serge, if I can add to that. Of course, the initial customization and software related invoicing is not going to be repeated in the next (inaudible) or the higher margin invoices.

Of course.

But if we talk about hardware only, it's 100% right.

Then, of course, you've also got the terminal base. Now they're already on around 15,000 terminals, and again, we believe that that number of terminals, if you look at the card to terminal ratio, there is absolutely no doubt that there is still a potential in a country like Ghana to grow from 15,000 to around in my view, 45,000 to 60,000 terminals. So there certainly is a huge amount of potential for more terminals to be implemented.

Now what's I think a little bit more exciting is that I think we tend to forget that we also get a certain amount of royalties or license fees that are payable on a yearly basis based on the number of cards that are actually implemented, and that those royalties do bring us basically 100% margin business. So it might only be $1 million or $1.5 million per annum, but at the end of the day, it's pure margin. It certainly makes up for some of the stuff that Herman was talking that's one-off.

On top of it, you've also got some very, very nice maintenance contracts which, if our technology's as robust as what we believe it is, can bring us anything between 5.5% to 6% of the value of the hardware, but can bring us anything up to about 8% to 10% of the value of the software on an annual basis as well. So it's another lovely income stream that will be coming in.

And outside of all of this, we've still got the other projects which each bank individual, the Central Bank are working on, whereby they might actually decide, and I don't know if you remember but I did mention what we have sold them, there are a number of other projects which include, for example, e-government applications that have not been included. Now candidly, if they're to go for our e-government application for voting or e-government for ID cards, we would be talking about substantial amount of money, in fact more expensive than our banking products that we really believe the Ghanaian government at this point in time might also go for.

Now apart from all of this, we've still got our wave 2 initiative that I think I had mentioned in one of my previous discussions, whereby we are now working closely with the Central Bank to actually see where Net1 can participate in no longer simply the provision of technology, but also utilizing the technology ourselves, either by ourselves or in conjunction with local partners, to actually make money out of the technology rather than out of purely selling or maintaining the technology.

So I feel very comfortable that I will be surprised that if Ghana continues to go at the rate that it's going, I will be very surprised if we do not generate at least equivalent numbers over the next 12 months or, in fact, in the next financial year, as we have this year.

Okay. That's very helpful. And is the main incremental revenue stream really on a per card basis though? The 3 million cards you've already assigned, is that something like -- just to throw in a number, is it $2 or $3 a year per card, or how shall we think about that?

When we're looking, the $2 or $3 per card, which I think is a very good number, you've got to look at that, that for every card that is issued, there should be $2 or $3 per month of revenue that is generated by the people that utilize the card to run a business. Okay, so that's the way that one should really start looking at this thing, and it could be $3, it could be $4, it could be $5. Now obviously, we want to participate in those businesses if we can.

We're already looking at one or two business that we've discussed with them, which involve, for example, the setting up of a prepaid [ATON] switching facility which, as you know, we do in South Africa, prepaid electricity, bill payments. Now there is no doubt that -- or the type of products that we in fact offering through EasyPay, so this is where the second wave comes in, whereby outside of what we've made so far, which I believe can be replicated for at least another year, the chances are by then we will be in a position to generate, in my view, even bigger profits out of the second wave initiatives once the technology has become ubiquitous and is in fact in the hands of all Ghanaians.

Great, thanks. And just a final question. Just when we look at Iraq, you did a nice job laying out where you get the economics from Iraq. It looks like the biggest potential revenue stream could be that 10% of any transaction, that's a huge interchange type figure. How big can that be? How are you thinking about the size of transactions in Iraq and what the revenue stream from that piece of the pie could be?

I think your assessment is correct. Because we do not have any equity in Iraq, we felt that -- and to be quite honest to get a 10% top line, that can easily be equivalent to 30% or 40% bottom line to be quite honest. So at the end of the day, we're very excited about the fact that Brenda has managed to pull that off.

More importantly, in our contract, we are in fact -- we have to be consulted and we have to agree to each of the transaction fees that will be charged by the local company to provide services or transaction [routing]. So we're not in a situation whereby they could basically charge whatever they want, like $0.10 a transaction and we would pick up 10% of the $0.10. We have to agree to it.

So we've actually been very conservative. We've based at the moment, for example, salary and wage or distribution of pension to work around the $2.52 to $3.50 mark, which means we would be making $0.35. And for us, $0.35 would be pure profit for every single transaction on a monthly basis which is just simply ending out or giving out or facilitating the payment of a salary or the payment of a pension.

Then after that, of course, we have all your normal money transfer, bill payment transaction, cash withdrawal, cash deposit, etc., etc., as well, so we could probably double that. So we'd have to say well, if we could make $0.60 to $0.70 per card per month, which is not unreasonable at the end of the day if you compare it to what we've done in other places, and we had 1 million cards, well you can work out immediately what sort of money that would be making us.

If they do achieve the million card in year one and 2 million in year two, or 2 million to 3 million in year two and 5 million in year three, then obviously that business would probably become the most lucrative business that we have today. In fact, it would probably be on a card basis or individual basis more lucrative than our pension and welfare business in South Africa.

Well, that's great to hear. Thank you.

Pleasure.

(OPERATOR INSTRUCTIONS). Our next question comes from Dhruv Chopra -- my apologies, Dhruv Chopra of Morgan Stanley. Please go ahead.

Hello, gentlemen.

Hello, Dhruv.

I just wanted to touch a little bit on the beneficiary issue again, and I know you provided some color, that there's been some eliminations, that SASSA has taken fraudulent people off. First of all, could you give us a sense on what the gross additions were for you guys, if you have that data available net of whoever came off?

And then secondly, as the welfare net is expanding with the child support grant age going up, the pension age coming down and the higher grant amounts, when should we start to see some of those things impact your numbers?

Dhruv on the first question, I don't have the exact information available, but assuming that the beneficiary numbers remain flat from Q2 to Q3, and we know that about 110,000 beneficiaries removed of the ones that have been identified as fraudulent, I would say that the increase in new beneficiaries is probably more or less the same amount, so 100,000 to 110,000 people over the quarter.

On the second part, there are some new answers in terms of what was announced by the minister now that the detail is -- has been set out for us. The reduction in the old age grant, qualifying age for male applicants from 65 to 60, is a process that will be phased in, and the way that they will do it is in this current financial -- government financial year, the age will be reduced from 65 to 63. The year thereafter, it will be reduced from 63 to 61, and then it will be reduced in the third year to 60. So by following a phased approach, current estimations are that there's probably 500,000 additional men in the country who would today qualify for this additional grant based on the age difference.

We will think -- I think we will start to see the impact of that as it was implemented in April when the government new fiscal year started. So I think that we will slowly start to see those numbers also coming in specifically in Q4. I think there are obviously a few administration processes at first they need to sort out. But I think it will start gathering momentum towards the end of this current calendar year.

On the child support grant aspect and reducing the age by one year, the government has indicated that that will commence on January 1, 2009, so we will not see any impact of the reduction in the qualifying age for child support grants for the remainder of this calendar year, and we will start to see the impact really I think in Q3 and certainly in Q4 of the following -- of fiscal 2009 for us.

Okay, great. And then on the wage payment launch for next week, can you share with us generally what the strategy is, how you're going to go about acquiring the customers? Are we talking about a few thousand people here? Are we talking tens of thousands, hundreds of thousands? How are you going to reach these employers and employees?

I think Dhruv, nothing has changed from the previous thing. I think Monday's launch is really the official launching of the --. It's a ribbon cutting.

We obviously have numerous potential plans which are more from, not so much working people, but obviously employers that are attending the launch. And obviously we have invited all of the different structures that we have identified and that are willing to go out and to actually start marketing and selling the account as a product to their own customer base.

So Monday, after Monday, we will be in a position to actually come back in a very, very short while after that, to be able to see where we've got four or five mainstream organizations that all represent, like I mentioned before, many, many hundreds of thousands, some of them millions of people, that are presenting their own plans to us, to actually say to us this is the way that they are going to go about and to actually touch their own customers, utilizing our own product base.

So I think give us the week of next week to be able to do the launch, to consolidate all of the different people that are going to be there. We will obviously target ourselves, our own customer base directly, because we want to make sure that obviously it happens. But we are not going to be able to hit 2 million people by going door to door or by signing up one or two employers. The intention of the year is to certainly re-utilize those four organizations to actually go out and market the product to their own customer base. They already have methodologies to do this because they touch them and see them on a weekly -- if not sometimes (technical difficulty).

So that's really the plan, Dhruv, and we will be able to (inaudible) that sometime during the next week or two.

Okay, great. And then just a final question if I may. Serge, in your prepared remarks, you touched on very briefly something about a new M&A program. You guys are sitting now on $4.50 a share in net cash.

Yes.

Can you just walk us through what your latest thought process is on the M&A side and where you potentially may be looking?

Well, if we think about the money we have in the bank and the fact that we -- unless my calculation, I'm not a financial guy, are incorrect, we (inaudible) of [eight]. So I was thinking that the company should buy itself as an M&A program.

No, but jokes apart, Herman has probably told you, and you know better than most, that obviously, until the SASSA agenda is finalized, after which we will know how much cash do we really need to have in our coffers to do the pre-funding, if pre-funding in fact becomes a requirement; there's still a chance that they might actually change their mind and award the tenders and do the pre-funding through treasury, which candidly in our view will always make more sense.

But certainly, we have made a decision at the executive level, whereby we are now going to commence a number of hubs around the world, and that will imply that either we will have to spend some money in setting up ourselves, or make some form of acquisition that is going to give us a footprint, the knowledge of the area, some access to some technological people, or business development people, in order to grow a little bit faster long term than the speed that we're going now.

And I think that's the type of M&A acquisition that I'm referring to. But we firmly believe that this is a good time in the life of the company to actually perform these acquisitions if they are available, and if they make sense and if they make money, in order for us to actually implement UEPS at a faster pace.

Great. Thank you very much.

Thank you, Dhruv.

We've got time for a last question.

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

Well just on my side, well, I would like once again to thank very much all of you for taking the time and attending this presentation. I hope that it is clearer in your minds in terms of what we are doing as a company and where we want to go.

We are certainly still very, very, very excited about what we've achieved. We are very, very excited about what we have managed to do in Ghana. We still believe that is something that's not been achieved at any time by anybody anywhere in the world, and certainly in that short space of time.

We really believe, and we already have some information from a number of other nearby countries, that we believe that Ghana will give us the launch date that you require to sign up many other countries in Africa in a much -- at a much faster rate. And we really believe that that will set us up to become the organization such as Visa and MasterCard for the developing economies of the world.

And we still haven't -- I know a lot of people sometimes say, well, it might be a great dream. I think the dream is starting to become more and more like a reality. So we're very, very excited and I'd very much like to thank our shareholders, all the ones that have been sticking with us through thick and thin.

And thank you very much, as I said, to all of you for also being with us and making the company -- and helping us to make the company what it is today.

Thank you.

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