Lesaka Technologies Inc (LSAK) 2009 Q1 法說會逐字稿

Good afternoon and welcome to the Net1 first-quarter results. (Operator Instructions). Please also note that this conference is being recorded. I would now like to turn the conference ever to Serge Belamant. Please go ahead, sir.

Thank you very much. Good morning to you all and investors in the US. Good afternoon to our investors in Europe and, of course, our investors in South Africa. Thank you for joining us for fiscal 2009 first-quarter.

As usual, with me, Herman Kotze, our CFO. Both our press releases and our 10-Q are available on our website at www.net1ueps.com.

During this call we will be making forward-looking statements, 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 FCC rules. Where required by these rules, we have provided a reconciliation of these non-GAAP measures to the most directly comparable GAAP measures as exhibited 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 operation in our latest 10-Q and in our press release in South African Rand to assist investors in understanding the changes in the underlying trends of our business.

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

During the first quarter of fiscal 2009, South African Rand, as we all know, are significantly weaker against the US dollar compared with quarter one 2008 and the same as quarter four 2008.

Regarding this quarter, I am very pleased with the results of our activities during this quarter, first-quarter fiscal 2009. The success of our business model is apparent in our financial results despite the recent disruptions in the financial market and concerns about the weakening global economy.

I am particularly pleased to welcome the BGS team to the Net1 family, and we are very excited about the new dimension that this acquisition brings to Net1 to accelerate the global deployment of our technology.

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

On this basis, we have shown an increase in fundamental net income of 26%, from ZAR140 million for the three months ended September 30, 2007 to ZAR176.7 million for the three months ended September 30, 2008. This translates into a fundamental earnings per share increase in South African Rand of 26%, from ZAR2.45 per share to ZAR3.08 per share.

Please note that this particular increase we have achieved is, in fact, 18% when we base it on the US Dollar.

To kick off, I would like to focus for a few minutes on the outcome of the South African tender for social welfare distribution. As you are all aware, we have received a final answer from the CEO of SASSA stating that the tender, 19/06 BS was to be terminated.

We have also heard from the CEO of SASSA that the decision to commence a fresh tender was being deferred, and no timeframe was given by the CEO as to when a new tender may or would be released.

The CEO of SASSA in his reply compiled 27 pages of reasons why he had decided that the tender had to be canceled. Without boring you all about the detail of his report, I would like to summarize it for you by stating that two main concerns were raised.

The first was that the adjudication committee had signed a number of discrepancies and a number of recommendations that had been made by the evaluation committee that in their mind were not in line with a number of the acts, including the PFMA Act as well and were not in line with the requirement of the tender itself.

Now, on this front, our belief is that the evaluation committee, followed by the adjudication committee's work, could have been in the position to actually rectify and correct these particular errors if such errors had been committed.

The second area that was disclosed by the CEO of SASSA as a reason for the cancellation of the tender was that he felt that the request for proposal in totality was in many areas ambiguous and, therefore, did not give the opportunities of respondents to compete fairly against each other.

On this particular front, we once again believe that the RFP was perhaps as clear as it could have been as the first two to three pages of the RFP clearly indicate what the intentions of the SASSA was, to go to tender, and then that, therefore, any company or any respondent that is in the know, in other words, that has a clear understanding of the distribution of grants in South Africa, would have been in the position to clearly understand what was asked of them to reply.

This being said, we are currently taking legal advice as to the possibility of asking SASSA to simply reevaluate the existing tender submissions rather than to simply cancel the tender, which may take another 12 to 18 months to be restarted, evaluated and awarded at a cost to the country which will run into billions of Rands.

We will, of course, inform our shareholders as to developments and also of the opinion of our senior advocates, which are currently working on the evaluation of this particular tender decision.

On a positive note, it is important to understand that as all tenders for all provinces terminate at the end of March of 2009, it will not be necessary for SASSA to opt for the following two options.

The first is for SASSA to decide to perform payment service internally. This is an option which we all believe, including the SASSA, which is either improbable and, in fact, very possibly impossible at this stage.

The second option will be for the SASSA to extend the existing tender awards by a further period, which in their mind would be sufficient for them to release a new tender, evaluate the new tender and award the new tender.

As no new tender has yet been released, and a new tender has first to be recompiled, in a substantially different way to the previous RFP, we believe that this re-tendering certainly cannot be commenced within the next three to four months.

Presuming this to be the case, it would still require approximately six to nine months after this event for the tender to be evaluated and awarded. And as for any other tender, it would require a further six months after the award for what they called a phase in and phase out approach, therefore making the minimum extension period to be awarded to all existing tenderers or all existing participants to be at least between 12 and 18 months.

This is, of course, unfortunate for our Company on the one hand as we felt that we were certainly in the position to be awarded the entire country, as it is, in fact, stated in a number of reports, specifically the adjudication committee report.

On a positive note, it is also important to note that for Net1, paying out pensions to over 4 million people is going to continue to be business as usual for the foreseeable future without any shrinkage in our margins and with the benefit of adding on millions of new beneficiaries and, of course, with the increase in grants, which has already been planned by the South African government.

All being said, we will continue to attempt to understand what in the tender were, in fact, the underlying reasons why this tender could not be awarded, and in the meantime we will continue to play the most significant role in South African social welfare, which is to continue to pay pensions and award grants or to pay grants to the 4-odd million people that we service on a month-to-month basis.

I would now like to focus on our international operations, and for the purpose of time, I am going to try to run through both where we are in certain countries, as well as what the potential that has been defined in a meaningful manner. If we commence with our Iraqi initiatives, I am saying that all the technology that has been implemented has been working efficiently, effectively and is starting to play a major role on behalf of the Iraqi government that have commenced to register in large numbers and to distribute what they refer to as war victim grants, the martyrdom grants, as well as the pension grants.

The total number of beneficiaries across these three sections exceeds 3.5 million people, and we have been told that it is the direction of the Iraqi government to sign out and register the first 1.2 million people before the end of our next fiscal year.

One of the benefits that the technology has brought is to enforce the new registration of all Iraqi people that are currently receiving grants and thus eliminate grants that were awarded to ghost beneficiaries, as well as to recapture the exact detail of these beneficiaries, resulting in a clean database for the government of Iraq.

And a further initiative that has been commenced as the result of the success of the technology is for the Iraqi government to commit to utilize the technology to distribute food assistance to 6.5 million families in Iraq. The project that has been identified will commence in Baghdad with 1.5 million families. And during this deployment, the Iraqi government will decide if those families should receive assistance in the form of food or if, in fact, they should receive assistance in the form of an electronic purse that will allow them to buy food at selected merchants.

System in Iraq is becoming and will become we believe one of our largest implementations we have worldwide today.

Moving on to Ghana, we have published in the past that already 3 million cards have been purchased by [GIBBS], already operates our technology on behalf of central government, and that 3 million cards have now been allocated and ordered by 27 banks, 14 out of those 40 savings banks that exist in Ghana. We are thus expecting further orders for cards as we still have to accommodate the 129 Community Banks which still need to be serviced.

An excess of 10,000 point of sale terminals have already been purchased, and we believe that GIBBS are tentatively looking at ordering a further 15,000 terminals, which they wish to deploy in the more rural areas of Ghana in order to facilitate banking for the customers of the 129 Community Banks.

We have also been successful at deploying the first five fully compliant UEPS ATMs, which carry all of the functionality and services which are offered by the UEPS system.

I am also excited to mention that the first 80,000 SIM cards, SIM card being the chip that is currently used by GSM operators, in this case [Xan] who have ordered from their supplier, [Gamato], 80,000 SIMs which need to have the embedded UEPS application. This we believe is a huge breakthrough, as our UEPS application runs equivalently well on any SIM or Smart Card, and the two systems are completely compatible with each other. GIBBS believes that the target market for the SIM facility is in excess of 6 million subscribers.

On a smaller scale, not to mention that in Botswana although there were a number of delays and problems, more political than technical in nature, the Botswanan government has endorsed our social welfare activities, and the rollout to the 100,000 first customers is already well underway.

We believe that further [1300] terminals for selected merchants will be ordered in the very near future and deployed in Botswana in order to facilitate and to increase the take-up of this system in their country.

On the mall developing front, we are still awaiting the results of our tenders in Zambia, in Malawi, and in Zimbabwe, and we feel comfortable that in some form or other we will be playing a part in all of these countries. And at last, we believe that the Philippines that have endorsed in principle our technology have decided that they are pretty much ready to go to a full RFP, which is going to demand from different suppliers to provide at least a similar functionality as we provide through our UEPS. We believe this could be a breakthrough for us by attracting the Philippines, simply because of the numerous number of people that exists in these empowerments, but also to give us a foothold to introduce UEPS elsewhere in neighboring countries.

Coming back to the home front, South Africa, I would like to say that our strategy to deploy more accounts through our [Greenrod] initiative and partnership is going well. I would like to say that our first large corporate has finally been signed, not only signed but also is currently being implemented. We are looking at around 30,000 people that are all going to receive one of our Smart Cards issued by Greenrod and are going to be able to be paid and being able to transact utilizing the UEPS technology.

As I have mentioned in the past, we have a number of other initiatives that we have embarked on in order to ensure that the rate at which we can sign in new accounts is not limited by a single access.

Review, I would like to mention our schools project where a conference took place where we presented to 900 different schools represented by their own headmasters and with the leaders of the school, we immediately got 150 of those 900 headmasters that signed up for the program. And over the last month and a half, that number has already increased to just over 400.

We are busily finalizing the contractual agreements. These do not only involve a school, but certainly involve the Parents Teachers Association, the governing bodies and the parents of the schools themselves. We are currently implementing two to three schools in quick succession to ensure that this particular pilot demonstrates to the rest of the governing bodies the power of the technology and its usefulness.

Please note that the concept beyond the schools project is to eliminate the need for cash on the school grounds and in any school activities, first removing the possibility of violence, the possibility of theft and crime, and more importantly, to eliminate the possibility of cash being used to purchase drugs, which are being pushed to the children.

If we look at our prisons project, we are now in negotiation as a private public partnership to re-process 360 prisons and to once again eliminate cash in totality within these particular grounds. The 360 prisons today manage directly or indirectly between 5 and 6.5 million people that are either incarcerated or under house arrest.

Our micro-finance project, which represents 3000 branches and in excess of 1200 owners and represents a total turnover of ZAR38 billion per annum, is being launched and implemented, thus creating further accounts for our Greenrod partnership. And please note that our take on each one of these particular transactions is around the 1.5% target.

Our initiative with [Linkfin] with the financial arm for a number of organizations in South Africa, including a number of unions under the head of COSATU are finalizing our contractual agreements to deploy 4000 ATMs and cash acceptance in all government offices throughout South Africa. The finance, which we estimate to be in excess of ZAR400 million, has been raised by Linkfin, 70% of which is being funded by international players and 30% from the Industrial Development Corporation of South Africa.

The business plan shows that breakeven should occur within 18 to 24 months, and certainly that cash flows and profitability become hugely successful in the third and fourth year of operation.

I would like to now focus very briefly on the BGS acquisition, which Herman, I have no doubt will discuss from a financial point of view.

To kick off, I would like to say that Herman and I visited Russia and Moscow almost immediately after the acquisition was completed as 20% of BGS is still owned by Sberbank, who is by far the largest bank in Russia and certainly in terms of branch network, employees and accounts, probably one of the largest banks in the world.

We were successful in convincing the CIO of Sberbank to demonstrate their technology at the conference which was to be attended by the Russian Federation Prime Minister, Vladimir Putin. This actually occurred in Sochi on the 19th of June or 19th of September of 2008. And our technology was demonstrated and the Prime Minister by German Gref who himself is the President and the Chairman of the Board of Sberbank. The press article was published after the conference, and the narrative, which I would like to read, which is only three lines of importance show that there is already a huge commitment by Sberbank toward our technology.

And I quote, "The multifunctional banking cards of the United Russian Payment System, URPS, and new technologies of its applications were demonstrated to Vladimir Putin. The main innovations showed at Sberbank's booth was the cardholders fingerprint identification by point-of-sale and ATMs. In addition, another novelty is the so-called virtual card created by mobile phones for singular payments and other transactions. The virtual card announces a security of Internet purchases and can be easily transferred to another similar phone." This, of course, was translated from the Russian.

However, resulting for the success and by the success of this particular demonstration, Herman and I were both invited to make several presentations to the top people in both Sberbank and Post. Mr. Gref on the one hand and [Mr. Yasmin] on the other.

We completed this and the net result wise that we have been asked to complete a JV proposal which would introduce the UEPS technology as the core banking system for the Russian Federation. We have already presented to the Post a strategy and a joint venture that would involve in excess of 25 million people, clients, as well as 165,000 postdelivery men in more than 40,000 branches. I

On the Sberbank side, we have asked to put in a similar proposal, which would allow us to launch fairly sizable projects regarding the social card initiative of the Russian government, as well as cellular phone banking. We will be proposing our solution to Sberbank on the 20th of November 2008, and we feel quite comfortable that there is a very good chance that the UEPS will become accepted by these two organizations, which in our view work and are the core of the banking systems and branch infrastructure system in Russia.

Similar initiatives as a result have also been proposed or are currently being proposed by a BGS team in other CIS Republic where BGS has already penetrated these markets through the sales of cards, terminals, licenses and their [dual-add] system, which is an equivalent of our UEPS system.

Before I head over to Herman to get into more of the nitty-gritty of the numbers, I would like to conclude that once again, we believe that our both defensive and attacking strategy vis-a-vis keeping the business we have and growing from strength to strength in different countries in the world is working very well. I am certainly very pleased with the performance of my staff, the performance of the IT developers and more importantly, the performance of our business development teams.

We believe that Net1 will continue to grow both from a national point of view within South African borders, but more importantly from an international point of view where we are starting to be known as a company that can deliver and deliver systems that actually have a value and perform work which is absolutely necessary for the well-being, the financial stability and economic development in any country.

I would like to thank you very much for your attention. I would like to hand over now to Herman, our CFO. Herman, over to you.

Thank you, sir, and greetings to our investors around the world. I will discuss the key results and trends of the first quarter of fiscal 2009, compared to the first quarter of fiscal 2008, along with the key trends between the first quarter of fiscal 2009 and the first quarter of fiscal 2008.

The results of BGS have been included in our results from September 1, 2008. In other words, one-month results is included in the first quarter of 2009.

We have also updated the Frequently Asked Questions section in our press release to provide further clarity on the questions we are asked most often by investors and analysts.

Again, for clarification purposes, I would like to mention that my following discussion will be based on our results in South African Rands, and 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 earnings press release filed yesterday evening.

For Q1 of 2009, our average rand/dollar exchange rate was 10% weaker at ZAR7.80 to the $1.00 compared to ZAR7.12 for Q1 of fiscal 2008, and sequentially it was unchanged compared to Q4 of fiscal 2008.

Looking at the current situation, the Rand has been extremely volatile over the last six weeks against the US dollar and has depreciated approximately 28% to its current position of around ZAR10 to the $1.00. Any fluctuation of the Rand obviously influences the dollar equivalent results of our South African operations, 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. The BGS contribution to the group results is mainly euro-based, and we will analyze the business separately in the future as the contribution becomes more material.

I am very pleased with our first-quarter financial results and with the completion of a number of material corporate events, as I believe we have made a solid foundation for the 2009 fiscal year and in the execution of our long-term strategy.

Revenue for our current quarter was ZAR550.2 million, up 24% year-over-year. Our gross margin was 72% compared to 75% for the same quarter last year and 74% 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 15% for Q1 2009, compared to Q1 2008, and decreased slightly by 1% sequentially from Q4 2008. The overall operating margin for Q1 2009 compared to last year's Q1 decreased to 40% from 43%. Sequentially, the operating margin decreased slightly from the 44% in Q4, mainly as a result of the inclusion of additional stock-based compensation charges BGS's intangible asset amortization.

Let's now analyze the business in more detail using our four segments. Our Transaction-Based Activities' segment increased its revenues year over year by 16% and sequentially by 6%, mainly as a result of higher revenue per grants paid from all provinces and increased grants distributed in four of the provinces where we provide a grant payment service.

In addition, the transaction volumes processed at EasyPay increased 14% compared to Q1 2008. Our operating income increased by 15% compared to the previous year and was largely unchanged from our last reported quarter. Our operating margin of 54% in this segment was the same as Q1 last year, but down from the 58% reported last quarter, mainly as a result of higher cost components resulting from interim rate adjustments and higher fuel cash handling and security costs in South Africa.

We continue to show strong and robust growth from our Transaction-Based Activities through the combination of price increases, growth in the number of beneficiaries, and the continued migration of beneficiaries to our merchant acquiring network. The total number of payments processed to beneficiaries increased by 3% year-over-year and was unchanged quarter on quarter, mainly as a result of the continuing removal of fraudulent grants from the system, especially in the Eastern Cape.

During Q1 of 2009, we also received an inflation price adjustment for the northwest province.

Looking forward, the Finance Minister of South Africa announced an increase of ZAR20 a month for most ground pipes during his interim budget speech a few weeks ago. These adjustments will become effective from October 2008 and will result in an automatic increase in our fee for payments made in KwaZulu Natal, which is our largest province, where our fee is based on the percentage of the amount dispersed.

During Q1 of 2009, our merchant acquiring system continued its strong performance as we processed a total of ZAR2.29 billion in transactions through our merchant acquiring network, an increase of 21% compared to ZAR1.9 billion during Q1 of 2008 and a sequential increase of 5% compared to the ZAR2.18 billion during Q4 of 2008, all on a completed pay cycle basis.

The productivity of our installed terminal base of 4170 terminals increased to 983 transactions processed per terminal during the first quarter of fiscal 2009 completed pay cycles compared to 858 transactions during Q1 of 2008 and 936 transactions during Q4 of fiscal 2008.

During the first quarter of fiscal 2009, we performed an extensive exercise to identify the merchants who has contacted to participate in our merchant acquiring system, but had not used the installed point-of-sale devices. After discussions with these merchants, a number of them canceled their contracts to participate in the system, and in addition, we have implemented procedures to identify merchants that are abusing our merchant acquiring system. The abuse is most often perpetrated by micro lenders posing as merchants who obtain our point-of-sale devices to recover payments from our cardholders. If a merchant is identified as abusing the merchant acquiring system, the contract is terminated and our equipment is removed.

During Q1 of 2009, EasyPay processed 135.2 million transactions with an approximate value of ZAR52 billion compared to 119 million transactions processed with an approximate value of ZAR26 billion during Q1 of 2008 and 133 million transactions processed with an approximate value of ZAR31 billion during Q4 of 2008. The average fee per transaction during Q1 of 2009 and Q4 of 2008 was approximately ZAR0.22 as opposed to ZAR0.21 for Q1 of 2008. The increase is mainly as a result of the change in product mix during the quarter. We expect the average fee per transaction to remain between ZAR0.20 and ZAR0.22 during the second quarter of 2009.

EasyPay's operating margins are steadily improving as the efficiencies of our new operating platforms and expense management systems become apparent, and as we set up more issuers and value-added service providers, the EasyPay operating margin for Q1 2009 improved from -- to 42% from 40% in Q1 2008, mainly due to higher volumes of value-added services processed during this first quarter.

We expect higher volumes processed by EasyPay during the second quarter of fiscal 2009 as a result of the holiday season, although the quantum of the increase may be lower than usual as a result of the global economic slowdown.

Our Smart Card Accounts segment had revenues of ZAR66.9 million for Q1 2009, which is an increase of 3% year-over-year. The total number of active Smart Card Accounts increased by 2% from ZAR3.9 million during Q1 2008 to ZAR4 million during Q1 of 2009. Sequentially, there was no growth in the number of active Smart Cards.

Our Financial Services business had revenues of ZAR13.9 million for Q1 of 2009, a decrease of 10% compared to Q1 of 2008 and a sequential decrease of 8% compared to Q4 2008. Revenues from our traditional micro-lending business continued to decrease due to increased competition, our strategic decision not to grow this business and an overall lower return on traditional micro-lending loans as a result of compliance with the National Credit Act.

Revenues from UEPS-based lending decreased during Q1 2009 compared to Q1 2008, primarily due to the lower number of loans granted. In addition, on average the return on these UEPS loans was lower during Q1 of 2009 compared with Q1 of 2008.

As a result of the SASSA tender process and the implication that any outcome may have had on our UEPS loan terms, we have not focused on aggressively growing this activity. Following SASSA's decision to cancel the tender process, we are now in a position to reevaluate our strategy, regarding the provision of Financial Services to our cardholders.

The final operating segment is our Hardware, Software and Related Technology Sales segment. This segment traditionally includes revenues that occur on an irregular or once off basis, and it can be difficult to predict sales from year to year. The current nature of BGS's operations are similar to those performed through Net1's Hardware, Software and Related Technology Sales segment, and therefore, BGS's results have for now been included in this segment. This segment includes the sale of UEPS and now direct related hardware and software, as well as the sale of our subscriber identity modules, or SIM cards, cryptography devices and SIM card licenses.

The amortization of BGS's related intangible assets for the month of September of $900,000 has been included in this segment.

This segment had revenues of ZAR134.5 million for Q1 2009, which is an increase of 75% year-over-year, mainly as a result of the delivery of cards and similars to the Bank of Ghana, the inclusion of BGS's results for one month, and sales to their bank.

The operating margin of this segment increased from 18% for Q1 2008 to 24% in Q1 2009, mainly as a result of high margin sales to Ghana [any bank].

The reduction in the corporate income tax rates for South African companies from 29% to 28% was enacted on July 22, 2008, and we reflected the change in our fully distributed tax rate from 35.45% to 34.55% during the first quarter of 2009. Our taxation expense for Q1 of 2009 was reduced by $3.5 million as a result of this adjustment's effects on our deferred tax liabilities.

Our startup equity accounting investments in Namibia, Botswana, Colombia and Vietnam continue to grow in line with our expectations, and we have exciting prospects in terms of business developments.

During this quarter, we recognized an unrealized foreign exchange of $6.1 million, which was the result of an asset swap arrangement in the form of a (inaudible) account instrument that we entered into in connection with the short-term bank financing we obtained to fund the BGS acquisition. We were required to mark-to-market the instrument as of September 30, 2008, and have recorded an unrealized gain of approximately $6.1 million or ZAR48 million for the first quarter of fiscal 2009. The core account instrument was repaid to us with accrued interest on October 16, 2008, and we realized a total gain of approximately $24.8 million or ZAR248.1 million on the date of repayment of this instrument.

Accordingly, during the second quarter of fiscal 2009, we expect to recognize a realized gain of approximately $18.7 million at the exchange rate on the date of repayment.

On a GAAP basis, our quarterly net income of ZAR204.8 million represents an increase of 60% year-over-year, and GAAP earnings per share increased by 59% on a constant currency basis, while fundamental earnings per share for Q1 2009 increased by 26% compared to Q1 2008 and decreased by 2% compared to the previous quarter.

Before turning to our balance sheet, the usual reminder 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.

As a general rule, however, we expect 100% or more cash conversion ratio over any completed pay cycle. As of September 30, 2008, we had $245.9 million of cash and cash equivalents, and included in cash and cash equivalents is $110 million or ZAR852 million invested in a (inaudible) account instrument. We entered into an asset swap arrangement in order to facilitate the short-term loan facility to acquire BGS. However, this asset swap arrangement was not linked to the loan facility directly and does not require redemption on the same date as the repayment of the loan facility.

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 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 $64.8 million of pre-funding outstanding at the end of September.

The increase in our Accounts Receivable compared with June 30, 2008 is largely due to our provincial governments paying us the amount outstanding at the end of September in early October. We opened the October 2008 [pay cycle at merchants] during the last four days of September, and we usually settle the merchants within 48 hours of payment. Therefore, we would have settled more merchants as of September 30, 2008 compared to June 30, 2008, which has resulted in a decrease in our other payables. As discussed above, the short-term loan facility of $110 million resulted from the BGS acquisition. The facility was repaid in full during October 2008 or during the second quarter as our inward listing on the JSE allowed us to utilize our Rand cash reserves for the repayment of a large portion, approximately $85 million of the loan facility, with the balance settled from our foreign cash reserves.

Our initial allocation of the BGS purchase price has resulted in an increase of $74.2 million in intangible assets, which will be amortized over seven years. Our goodwill increased by $40 million as a result of this acquisition.

Please bear in mind that the preliminary purchase price allocation is based on management estimates and may be adjusted up to one year following the closing of the acquisition.

We filed the pro forma financial statements with BGS last night. This indicates BGS net income on a US GAAP basis for the year ended December 31, 2007, at EUR5 million and the net asset value at EUR13.3 million. The pro forma combined financial statements illustrate a small dilution in net income if we exclude the after-tax intangible amortization charge and the once off facility fee.

Our deferred income tax liabilities have increased as a result of the deferred tax liabilities raised on the intangible assets acquired in the BGS acquisition, partially offset by the release of deferred tax liabilities as a result of the reduction in our fully distributed tax rate to 34.55% during the first quarter.

Our balance sheet as at the end of Q1 of 2009 reflects the special convertible preferred stock and B class preference shares for the last time. Following our inward listing on the JSE in October, these shares were converted into common stock, and our future balance sheets will reflect the simplified capital structure consisting only of common shares. Our second relisting also provides us with more flexibility to utilize our Rand reserves internationally.

In conclusion, our business is firing on all cylinders, and we are optimistic about our future prospects, regardless of the current negative market sentiment, especially towards emerging markets. We will continue to focus on emerging market opportunities as these have always served us well in good times and in bad. Based on the assumption that our current business activities and initiatives will continue as usual, we still expect to grow our fundamental earnings per share by at least 15% on a constant currency basis for fiscal 2009.

With that, I would be happy to take your questions. Please proceed to Q&A.

(Operator Instructions). Dave Koning, Baird.

Nice job. First of all, I just wanted to pursue the Iraq food program a little bit. It sounds like 6.5 million families or so might be under this program. And I am wondering, would this be a recurring revenue type business? Would this be like the $3 or $4 per month type work that you do in South Africa for grant distribution right now?

At this point in time, as you know, that in Iraq we work on taking 10% off the top. In other words, we get 10% of any transaction fee or any income that is generated direct to end directly by the UEPS by the local partner, simply because we chose not to take equity in any company in Iraq at this point in time.

Now, the 6.5 million or so families at this point would fall under that particular same - the same financial relationship or financial arrangement. However, because of the size of the 6.5 compared to the other 3.5, we are busy at the moment talking to the Iraqis to see if we cannot modify slightly the business model. Obviously, we'll be taking a little more risk than what we take today because today we carry no risk at all. But maybe by taking a little bit more risk, we would be able to actually increase our potential return over the next couple of years. So at the moment, we work on the same 10% off the top, but we will certainly update you if that changes in the future.

Great. Thanks. And then one follow-up, just on Russia. You mentioned 25 million people or so. Would this be somewhat like the Ghana contract, where you would become the payment system, you would get a lot of hardware and software fees with smaller recurring fees?

No, no, no. The Ghana contract was something we did, as you know, with Central Bank of Ghana, which means we really did not have much of a choice. In that Post and in Sberbank, both of those negotiations involve the formation of a 50-50 JV, whereby we intend to obviously make money out of every single transaction that is coming through the system and candidly not to worry too much about making money out of software or hardware sales.

So the software and hardware sales, in fact, might actually go through other suppliers on which obviously we would be able to impose a license, a UEPS license. But our real benefit to our real income will be in perpetuity through a 50-50 partnership with both of these organizations based on the transaction's debases.

Okay. And how big could that potentially be, just in terms of revenue?

Once again, I don't want to jump the gun. But we know that the Post today has 25 million people who they distribute pensions on behalf of the government, too. And the first thing they want to do is to bank those 25 million people by issuing them a UEPS card and obviously allowing them to start transacting with all of your UEPS functionality.

Now, we are currently obviously working with them. What would be the fee that we could levy off them, those particular cardholders, on each of the different transaction types, as well as what fee the post office or the Post would be able to pay us for, lack of a better word, for the savings that they would achieve by implementing the UEPS technology by eliminating perhaps not so much personnel, because I think they are not into the business of actually getting rid of people that work for government, but more in terms of actually eliminating fraud, eliminating a lot of cash management aspects, eliminating shrinkage, and facilitating and offering a much better service, simply because of the speed of delivery.

So we are working on that specific business plan with them at the moment, and once we have done that, we will be in a position obviously to actually give you a very good indication of what it could look like. But it is a little bit premature right now because any number that you multiply by 25 million sounds stupid in the first place.

That's great. Thank you.

Dhruv Chopra, Morgan Stanley.

Given that SASSA now should hopefully be a little bit less of a distraction in terms of demands on your time and so much else going on, can you help us understand, can you help us understand like what are your top three priorities? Where are you focusing your time over the next 12 or 18 months?

Again, it is something we were discussing at the board meeting only shortly. And the first priority that I set myself outside of South Africa is to attempt to complete the JVs. We have got Sberbank in Russia, as well as the Posts. Simply because these are two big customers today or at least one of them is a customer of BGS. But under what I would call the typical sales of goods model, which might give you EUR6 million or EUR7 million a year, but it is really not going to give you EUR100 million a year. So

Herman and I, in fact, are driving that initiative, together with the current NV and CFO of BGS, and that is certainly something that -- we have already been to Russia twice -- I am going there again now -- in the last two months, and that is certainly going to be my first priority outside of South Africa.

Within South Africa, obviously the deployment now that we are getting a little bit more ready in terms of really launching [Renard] in a big, big way considering that we finally received our mitts from MasterCard. In other words, we are almost ready for action. I think it was to be January/February to do it on the large scale. Well, I am really working at the moment already at putting together the network that is going to allow us to really get account cardholders by the thousands at a time rather than by one at a time. That is what the school project, the prison project, the micro-finance project and the Linkfin projecting is really giving us. That is again controlling and deploying infrastructure and making sure that we have different people that are going out there and basically selling those particular accounts on our behalf. So that is two of the things that I am doing.

And the third one, which is something of great importance, it's our Company restructured a little bit. We think we are going to separate South African activities, which are already directly operational, to African operations, which are more sales in terms of business development and sales at the different level where we do not operate. Obviously the CIS, including Russia, and starting up two other subdivisions of Net1, one which will be in the United States, in order to service the US and South America, and the other will be very possibly in Australia in order to service the Asia/Pacific-Rim.

So that is the three things that are on our plates apart from still babysitting what we are going to do to to SASSA in the short term.

That is a fair amount. And if you could, Herman, maybe just let us know if you have the information, what was the cash balance at October 31 after you've paid for BGS?

I don't have it offhand. But it will depend on obviously exactly what the exchange rate was on the 31st of October. But I would say that we probably had in dollar converted terms, and taking into account the pre-funded social welfare grant receivable, probably about $220 million-odd, I would say, that we would make after the repayment of the loan.

And then just very briefly, you mentioned this in your last comment, but the MasterCard relationship, so that sounds like that has actually come through.

Yes, yes, yes. We have had, like I mentioned before, we have got approval of MasterCard to run both [ENV] and UEPS on the MasterCard branded card, specifically in South Africa. But in order to be able to utilize this particular approval, one is to actually become completely MasterCard compliant, which means you have to buy the equipment. You know they are not proprietary, right? They have an open system. But you have to buy the equipment. You have to interface to them. And all of this through MasterCard can take six weeks to do one thing, two months to do the other. We probably got the mid, which is really the piece of kit that we need to interface to MasterCard internationally. That has been implemented as we speak, which means we are still on target for January/February to be able to be not only legally operational, but then actually to be operational operational. And that is what we have been waiting for before we can really accelerate the deployment of our Greenrod participation.

Great. And then I will just ask one last question. I know we are running short on time. Obviously the stock has been under a lot of pressure over the past couple of months. What actions, if any, could you and the board take to kind of reinstall the confidence and potentially increase shareholder value?

I think that is something that we have spent half of the day of the board meeting discussing, first to try to understand why it is that our shareholders had lost confidence, but I don't think some items have a hell of a lot to do with us.

So from that point of view, I think we have decided the best way to attack this is to wait and see and to continue to do what we have been doing over the last so many quarters, namely to continue to deliver sound and good financial results and to continue to spread the UEPS across the world. So that is on the one side.

On the other side, of course, you probably saw that we have reactivated that $50 million buyback option, which tentatively today at $11 a share does not sound like the worst thing that we can possibly do, but just about the best investment that we could make. So obviously that is something we are looking at very, very, very strongly.

And then we are going to wait and see to see how the market is going to stabilize over the next quarter or so. And then we've got one or two other plans that we are discussing with the board, simply because we have got to try to find a way of either bringing back Net1 where it belongs, which is not on the key of three or four after the cash is taken out, but certainly we believe we are stronger and better than most of our peers, candidly on the worldwide basis, including United States firms.

So at the end of the day, if we are not going to get that recognition, then obviously we are going to have to try to find some other way of getting it. And I am sure that if we can route the UEPS's system, we can find ways of sorting out that problem.

I think we've got time for one last question.

[Murray Findafelder], UBS.

I wondered if you could take a minute and talk how the landscape may be changing as far as competition. Who is your biggest competition when you go out to make a proposal, and how do you feel your proprietary system is faring in that regard?

Again, it is a very good question. And to be quite honest, there was a time where normally we used to tender -- the type of tender that used to come up used to pretty much ask for what I would call the traditional payment systems. And therefore, the normal people use to answer, such MasterCard, Visa, IBM, people of this type of nature.

Today in the economies that we move into, we are finding out that governments are asking for systems with completely different functionality, which cannot be delivered by such systems. And this is where our advantage is now coming in in a big, big way is that the tenders are now written differently. But the people that are tendering are basically offering the same technologies that they use to offer over the last five, 10, 15 or 20 years, which means most of the time, they can supply faster in 15%, 20% of the functionality required, but they normally cannot actually supply the functionality that the people are really looking for.

So this is where we are coming in, sometimes to be quite honest, with prices and offers which are substantially greater than our competitors. But at the end of the day, the central banks or the large customers that we are going after, a lot of them are government, actually believe can actually solve the problem which they are having. And this is where I think our big advantage is coming from.

In terms of what you call proprietary systems, to be quite honest, I think systems such as Visa or MasterCard are not being seen as being proprietary anyway, which means that we are no more or less proprietary than what they are.

What we have now done to make that even clearer is that we do give anybody the chance to supply hardware or even to supply cards. A point of serve device is ATM, which can run the UEPS, and like Visa and MasterCard, we just adopt the same mobile whereby we do certifications at a fee, and we charge, of course, fees depending on number of cards issued and licenses that people must have in order to run our UEPS technology. And we really make our money through the JV that we can make locally either with the central governments or with the large banks in the particular countries we go into for whoever else is actually wanting to run the Company. It could be even a cell phone provider.

So we believe that the mobile mall is more open, or at least it is perceived to be, like a Visa and MasterCard, more open than what it was in the past because we can invite any suppliers to play. But candidly, we are no longer focusing out of making money out of hard way anyway. We only want to make money out of transaction fees. So we don't really care who is actually going to deploy the infrastructure and put it out as long as it gets done.

That is a great answer. Thank you.

Thank you very much for attending the call to all of you out there, making the time today. Great talking to you, and we look forward to the next call in February. Thank you to you all.

Thank you, sir. Ladies and gentlemen, on behalf of Net1, that concludes this conference. Thank you for joining us. You may now disconnect your lines.