Lesaka Technologies Inc (LSAK) 2009 Q3 法說會逐字稿

Good afternoon and welcome to the NET 1 Third Quarter Results. (Operator Instructions).

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

Thank you very much. Good morning to our investors in the US. Good afternoon to our investors in Europe and South Africa. Thank you very much for joining us for our fiscal 2009 third quarter earnings call. As usual, with me my CFO, Herman Kotze, and both out Press Releases and our 10-Q are available on our website at www.net1ueps.com.

As a reminder, 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 in the SEC rules. Where required by these rules, we have provided a reconciliation of these non-GAAP measures to the most directly comparable GAAP measures and exhibits in the Press Release dated yesterday.

We will primarily discuss our results in South African Rand, which is a non-GAAP measure. We analyze our results of operations in our latest 10-Q and in our Press Release in South African Rand to assist investors in understanding the changes in the underlying trends of our business. As you know, the Company's result can be significantly affected 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.

I will now move onto the fiscal third quarter's result. Now overall I really believe that we produced another very, very strong quarter, specifically in our core business. We continue to expand our activities outside of South Africa. We made some significant progress in extending the scope of our services and rolling out new products and some of our new technologies and we saw some positive development within the South African government.

For example, we signed a new contract with SASSA, which secures our market-leading position for at least another year, gives us in some aspects better terms and positions us very well for another renewal, further growth in our beneficiary numbers or and possibly a contract for additional services, specifically regarding technology.

We also saw a new government elected that has campaigned on expanding the size and scope of social welfare grants, which I believe will benefit us in the future as we may be the only vendor who can help the government to fulfill its promises in the near term.

Now when we look at our results on the US GAAP basis, I know that the strong performance is somewhat diluted due to the 34% depreciation of the South African rand versus the US dollar. As a matter of interest, this depreciation appears to be reversing itself at the present time. We were talking about ZAR10 to a dollar a while back and we are now around the ZAR8.30 to the dollar, so things are looking very good for us far as that is concerned for the fourth quarter.

I know that we are also faced a few one-time items that created some very difficult year-over-year comparisons for us in this quarter and we will be glad to walk through -- you through and explain the impact of these items, and Herman will probably do that at a later stage. I do not believe, however, that these factors alone reflect the true operating performance of the Company in the quarter. In fact, on a constant currency basis our revenue in South African Rand has increased by very strong 19% year-over-year and our fundamental net income has increased by 9%.

Looking at our core business I was extremely pleased with our strong transaction growth, which generated 30% revenue growth and a 43% increase in the operating income of our transaction based activity segment, which represent over two-thirds of our total revenue and roughly three-quarters of our total operating income.

Our cash position remains quite strong with over $120 million in cash and equivalents and very little debt. As far as I am concerned, our strategic position is better place than ever. The Prism and BGS acquisitions we have made have gone very well and we are just beginning to realize the benefits of these assets.

Our projects in Iraq and Ghana are going very well. Our second phase initiatives are being deployed in Namibia and Botswana and there are very good signs that Nigeria may at last well start expanding rapidly. Newest prospects in the Philippines, Morocco, Lisutu Angola, Zimbabwe are looking extremely exciting fueled by the successes we have achieved in Ghana and Iraq.

Prospects in the Ukraine and Russia, driven by our BGS Team, are increasingly exciting, as these new projects will be based on transaction income streams and no longer on one-off sales. We have also made a break through with Grindrod Bank, which has now been certified as a Master Card issuer for both debit and credit card.

What does this mean? This breakthrough has allowed us to complete the development of our VCC, our Virtual Card product, which will soon be released as a live system. The system, which has been patented, we believe removes all of the current risk associated with card not present transactions in the card not present world, which has been, as we all know, under tremendous attacks for a long time and continues to be thwarted by fraudulent activities. Our system solves these problems.

We also hope to announce a number of these exciting opportunities in the very near future. We have also almost completed our internal restructuring of which I spoke about in the last quarter and defined eight mutually exclusive business units which will now operate at their own pace with their own dedicated resources and their own dedicated management teams. We believe that this will assist the Company to grow at the much faster rate and to tackle many more initiatives at the same time, so in looking back and taking the foreign exchange impact out of the equation, I think that our results were extremely strong. I believe that our Company is better positioned for long-term growth than ever before and I think we remain well on track to achieve the minimum of our 15% growth in fundamental earnings on a constant currency basis for fiscal 2009.

I am also delighted to announce the appointment of Dhruv Chopra as our Vice President for Investor Relations. Dhruv, as some of you well know, was previously an analyst at Morgan Stanley and has a very good intimate knowledge and insights of our business and industry. Dhruv will join Net 1 shortly and we welcome him as a member of the Net 1 Team. We believe this appointment will provide our shareholders with much improved access to our Company and its Management.

To conclude, it is clear from the increasing number of inquires I and our Team's receive from all over the world on a daily basis that Net 1 is fast becoming known as the provider of solutions that can deliver in time and within budget and this fact bodes very, very well for the future growth and sustainability of our Group.

With that, I will turn it over to Herman, our CFO, who will explain some of the numbers in more detail. Herman, over to you.

Thank you, Serge, and greetings to our investors around the world. I will discuss the key results and trends of the third quarter of fiscal 2009 compared to the third quarter of fiscal 2008, along with the key trends between the third quarter of fiscal 2009 and the second quarter of fiscal 2009. We have also updated the frequently asked question 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, as this provides the best indicator of the Group's actual operational performance. 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 Q3 of 2009 our average rand/dollar exchange rate was 54% weaker, as Serge said, at [9 rand 96] compared to 7 rand 55 for Q3 of fiscal 2008 and there was no significant difference when compared to the 9 rand 96 for Q2 of fiscal 2009.

In the meantime, as Serge said, the rand has strengthened considerably during the last few weeks specifically and it is currently trading at around 8 rand 40 to the dollar. 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 co-operational drivers are clearly visible from these numbers.

The BGS contribution to the Group results is mainly Euro based and we will analyze this business separately in the future, as the contribution becomes more material. I am pleased to report that another quarter that reflects the solid fundamentals of our core business and I believe that we are well on track to achieve our 2009 earnings target.

As Serge mentioned, there were a number of factors, apart from the currency depreciation, that significantly affected the comparability of our 2009 third quarter results to those of last year. On an overall basis our operating income decreased by 2% for Q3 2009 compared to Q3 2008 and the overall operating margin for Q3 2009 decreased to 57% from 45%, mainly as a result of the following factors.

First, Q3 of 2009 includes a loss from BGS, which we did not own during 2008. As I explained during our last earnings call, where we reported an operating profit of $4.9 million for BGS, BGS's operations are highly seasonal with its second and fourth quarters typically being its most profitable and its first and third quarters generally the weakest. Our 2009 results also include for the first time significant intangible asset amortization related to the BGS acquisition.

Second, our fiscal 2008 results were favorably impacted by revenues we reported from our Ghana contract, which was largely completed prior to the most recent quarter.

Finally, we recorded a higher stock based compensation charge in 2009 compared with the prior year.

In addition to these factors that influenced the operating profit, our net income and GAAP earnings per share in our previous year were favorably impacted by a reduction in our fully distributed tax rate, which became effective during the third quarter of 2008.

We use a non-GAAP measurement, called fundamental earnings per share, to present a result that eliminates some of these once off items that complicate the year-on-year and quarter-on-quarter comparisons. We typically eliminate the effects of irregular tax changes, the amortization of intangibles, stock comp charges and unusual non-operational or non-cash flow items when we calculate this measurement and we also provide this measurement on a constant currency basis to reflect the actual operating efficiency of our core business.

On this basis our fundamental earnings per share increased by 14% and 22% respectively for the three and nine months to March 2009. Revenue for our current quarter was ZAR556.6 million, which is up 19% year-over-year. Our gross margin was 73% compared to 74% during the same quarter last year and 72% during our preceding quarter but please remember that our gross margin can fluctuate significantly due to our diverse product offering.

Our preferred measurement of the Group's profitability is to focus on operating income and operating margin per segment. Our transaction based activity segment increased its revenue year-over-year by 50% and sequentially by 11%, mainly as a result of higher revenue per grants paid from all provinces and increased grants distributed in four of the five provinces where we provide a grant payment service.

In addition, the transaction volumes processed at EasyPay increased by 10% compared to Q3 of 2008. Now operating income increased by 43% compared to the previous year and increased 24% sequentially. Our operating margin of 60% in the segment was 5% and 6% higher than that reported in Q3 2008 and Q2 2009 respectively, mainly as a result of price increases and the timing of the opening of the April 2009 [pay file] in March 2009, specifically in KwaZulu-Natal, our biggest province, which did not occur during Q3 of fiscal 2008.

The key metrics that drive our welfare payment business exhibited the following trends during the third quarter. One, the total number of payments processed to beneficiaries increased by 2% year-on-year and there was a slight 1% decrease sequentially. During -- two, during Q3 of 2009 we also received an inflation price adjustment for the KwaZulu-Natal province.

Three, in addition, we benefited from the interim increase in the grant amount paid to all beneficiaries announced by the South African Finance Minister in October 2008, specifically in the KwaZulu-Natal province, as our fee there was based on a percentage of the amount as [boost].

Four, during Q3 of 2009 our merchant acquiring system continued its strong performance as we processed a total of ZAR2.78 billion in transactions through our merchant acquiring network, an increase of 57% compared to the ZAR2.02 billion during Q3 of 2008 and a sequential increase of 11% compared to the ZAR2.5 billion during Q2 of 2009, all on a completed space cycle basis. The productivity of our installed terminal base of 4,263 terminals, again increased to 1,129 transactions processed per terminal during the Q3 2009 completed pay cycles compared to 953 transactions per terminal during Q3 2008 and 1,056 during the preceding quarter.

Towards the end of March 2009 we signed a one-year agreement with SASSA related to our pension payments business following the termination of our previous agreements. We have agreed to a standard pricing formula for all provinces based on a transaction fee per beneficiary paid, regardless of the number or amount of grants paid to beneficiary, and that is calculated on a guaranteed minimum number of beneficiaries per month.

Under our previous contracts, depending on the province we received either a fee per grant distributed or a fee per beneficiary paid or a fee based on a percentage of the total grant amount distributed. In addition, SASSA will now assume responsibility for the pre funding of all social welfare grants with the effects from the May 2009 payment cycle. We do not expect that the new contract will materially affect our future net income since the reduced pricing should be offset by the increased interest income we expect to receive as a result of the elimination of our pre funding requirements.

In other words, our revenue and operating income may reduce but this will be compensated for by improved interest income depending on prevailing interest rates.

During Q3 of 2009 EasyPay processed 142.6 million transactions with an approximate value of ZAR29.9 billion, an increase of 10% compared with the 129.2 million transactions worth ZAR25.8 billion processed during Q3 of 2008 and a decrease of 8% compared to the 155.7 million transactions processed with an approximate value of ZAR32.7 billion during Q2 of 2008. The sequential decrease from Q2 is attributable to the very busy Christmas holiday season during Q2.

South Africa has one of the largest prepaid mobile phone [air time] markets in the world and we believe that we through our EasyPay offering can generate additional revenue from the provision of a transaction switching service to retailers and other sellers of prepaid air time and electricity. The increase in transaction volumes during Q3 of 2009 was primarily driven by an increase in prepaid air time and electricity volumes. Growth in the South African retail sector has started to slow down and we expect flat transaction volume during Q4 of 2009. The average fee per transaction during Q3 2009 was ZAR0.21 compared to ZAR0.20 during Q3 of 2008 and ZAR0.21 during the preceding quarter. We expect the average fee per transaction to remain between ZAR0.20 and ZAR0.22 during Q4 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 sign up more (inaudible) issuers and value added service providers. The EasyPay operating margin for Q3 2009 improved to 45% form 21% in Q3 2008, mainly due to higher volumes of value added services processed during this quarter. We expect similar volumes during the fourth quarter of 2009.

Our SmartCard account segment had revenues of ZAR66.5 million for Q3 2009, which is an increase of 3% year-over-year. The total number of active SmartCard accounts increased by 1% from 3.9 million. During Q3 2008 to 4 million during Q3 2009. Sequentially, there was a decrease of 1% from the 4.1 million during Q2 of 2009.

Turning to our financial services segment, the main news is that we sold our traditional microlending business during March 2009 to Finbond, which is a JSE listed family company. Strategically, we viewed our traditional microlending business as non-core, as our main intention was to gain an understanding of the dynamics of the microlending industry in order to development the appropriate product and applications, which have now become part of our UEPS based microlending activities.

The payment consideration was settled through the issuance of new Finbond shares and we also exercised an option to increase our shareholding in Finbond to approximately 20%. Finbond has a national metric of 178 branches following the sale of our traditional microlending business to them. We have signed an agreement with Finbond under which we have agreed to install our UEPS technology and point of sale devices for the marketing of prepaid electricity, prepaid cell phone air time and [go payments] into all of Finbond's branches.

In addition, Finbond will utilize its branch and broker network to market our wage payment and EasyPay bill payment solutions. Our investment in Finbond gives us access to a national brick and mortar infrastructure and allows us to participate in the future success of our joint initiatives. The sale of this business has negatively impacted the quantum of revenues in the segment. However, due to the elimination of the low profit contribution of the traditional microlending business, as well as the high operating margin of our remaining UEPS based lending business our margins have and I expect it to improve in this segment.

Our financial services business had revenues of ZAR13.5 million 4Q of 2009, an increase of nine -- a decrease of 9% completed Q3 of 2008 and a sequential decrease of 4% compared to Q2 2009. We recorded a loss of approximately ZAR7.5 million on the sale of the traditional microlending business and this loss has negatively impacted the operating margin in this segment for this specific quarter.

The final operating segment is our hardware/software and related technology sales segments. 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. The current nature of BGS's operations are similar to those performed through Net 1's hardware, software and related technology sales segment and, therefore, BGS's results have been included in the segment.

The amortization of the BGS related intangible assets for Q3 of 2009 of $2.1 million has been included in this segment. This segment had revenues of ZAR118 million for Q3 of 2009, which is an increase of 5% year-over-year. Last year's Q3 revenue included the high margin Ghana project implementation and this year's Q3 now includes BGS revenues of approximately ZAR21.5 million.

The ever changing contributors to this segment cause volatility in the operating margin from quarter to quarter. The operating margin of this segment decreased from 36% for Q3 2008 and from 27% in the previous quarter to negative 12% in Q3 2009, mainly as a result of limited seasonal revenue activity by BGS and increased amortization of BGS intangible assets. If we exclude the intangible asset to mobilization, the operating margin for this segment was 12.4% during Q3 of 2009.

Now start up equity accounted investments in Namibia, Botswana, Columbia and Vietnam continue to grow in line with our expectations and have exciting prospects in terms of business development. On a GAAP basis our quarterly net income of ZAR143.2 million represents a decrease of 28% year-over-year and GAAP earnings per share decreased by 26% on a constant currency basis, while fundamental earnings per share for Q3 2009 increased by 14% compared to Q3 2008 and decreased by 4% compared to the previous quarter.

Before turning to our balance sheet to the usual reminder that our cash provided for 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. We expect this cash outflow to decrease significantly during the fourth quarter of fiscal 2009 due to the elimination of our obligation to pre fund social welfare grants in KwaZulu-Natal and the eastern (inaudible) provinces. We will continue to pre-fund certain merchants who assist us with the distribution of grants through our merchant acquiring system.

As of March 31, 2009 we had $121 million of cash and cash equivalents. The business remains very cash generative and I remain comfortable that we have sufficient liquidity between our cash and cash equivalents and our current traded facilities to fund our current and expected working capital requirements. We generated cash from operating activities of $5.1 million during Q3. The increase in our accounts receivable compared with June 30, 2008 is largely due to the inclusion of BGS. Amounts due from SASSA for services rendered, which have subsequently been received, and the opening of the April 2009 payment file earlier in March 2009 compared to June 2008.

Our goodwill and intangible assets have increased as a result of our acquisition of BGS. 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 Q1 of 2009.

In conclusion, we are excited about the future opportunities and prospects for our business under pinned by our business fundamentals in South Africa and elsewhere and our solid financial base.

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

(Operator Instructions). Our first question comes from David Togut of First Manhattan Company.

Serge, you mentioned quite a number of initiatives on the international front, a number of countries where you've had some initial start, like Nigeria and a number where you don't currently have operation, Philippines, Angola, Zimbabwe etcetera. Could you go into a little on these possible new countries and, in particular could you also update us on the progress of your pilot with Burbank and Russia?

Okay, David, but if we start maybe with Burbank it's probably the easiest. We have finalized and implemented the pilot with [Spar Bank] in [Aferan] region as planned and on time the pilot was a success and remember that the pilot did not only include, for lack of a better word, the basic -- the system, that had to be upgraded to cater for fingerprint, involve metric identification of users, but also a system that when multi-functional by holding onto the same card not only the payment application but a social welfare application as well as a contact to the transportation application.

Now this came across very, very well. My understanding is that the let's say the power that be in Russia will be visiting us around in the next month or so. Some of them, they've already been there to make sure that obviously everything works and that the top guys do not there for nothing. But once I think these people have gone around and seen the success, we know that they will be deploying at least the same type of system in a number of other regions in Russia. And that is only good for us because we will then continue with the BGS transitional business.

Now, more importantly, that will now give us opportunity to move onto our phase two, which we had pre defined with Spar Bank, namely to set up a joint venture, which will now be based on the transaction model rather than a simply sales of terminals, cards and licenses. And that is really the model that we are working very hard for simply because it would give us an opportunity to change a model of one off sales to recurring revenue. As you can be well aware, as Spar Bank today is a majority of the card base and terminal base in all of Russia, obviously it is a very important partner. And if we can do a JV with them I think we have a good chance that we could participate into the new national payment system that the Russian people went to implement.

So that's the good news about Russia. I think perhaps things will be a little bit more complicated than they look because to own a percentage of the national payment system of a country the size of Russia sounds perhaps a little bit ambitious. I think we will be able to participate in it. To what extent at this point in time in terms of percentage might be perhaps not 50% but fundamentally less? But I would be quite happy with anything in the regions of 5% to 10%.

Now, the other country that we mentioned about and I think we talked a little bit about a number of countries, including Nigeria, that we know is a bit of a slow start there. It appears that perhaps it's like anything, any market it takes a little bit of time before things sink in but we are at last getting to the stage whereby we are being approached by numerous companies in Nigeria as that they've got very often government contracts, which are very sizable, pretty large insurance companies that are not only one thing to purchase equity in a Nigerian switch, which obviously we would be delighted to offer, simply because the more people from different industries participating the switch the more chance we have of generating higher production volumes.

So that is starting to show I think what I believe is going to be a very, very good trend. On top of it, we've got a number of people that have approached us that have today already government contracts, which represent millions of Nigerian users and they're finally now appreciating and realize the power that the UEPS switch can actually give them to conduct their own business. So I might be speaking a little bit early but I really believe that we have now reached what I would call the bottom of the trough and we are certainly reached the turning point and now start improving and I think once this happens I think Nigeria has a number of people and the capacity to actually grow at the rate which is much, much faster than anyone else.

Now, in the rest of Africa due to what I believe has been a fantastic success in Ghana specifically and in Iraq where we I think have made not only huge market penetration but we're basically we have become the national payment system. Many, many African countries are now looking at replicating or duplicating the Ghana model and that is something that, as the CEO of the Company I can assure is true because we continuously get calls which are unsolicited from our side from different people at very high level in government that are very, very keen in saying, "Well, how do we go about and implement a Net 1 solution in our own country, because we like what we have seen?"

Now there are countries such as Morocco, Angola, Zambia, and a number of others that I've mentioned, which are a lot further than simply talking to us but they've already been involved with trying [to see them]. In terms of getting proposals and a lot of these countries are basically at the moment in contract negotiations, I know that a lot of people have sort of raised an eyebrow when we talked about our initiative in Zimbabwe because we know what Zimbabwe is going through. Now one thing that people don't understand is that countries such as Zimbabwe, that have got an economy that already is basically gone down the toilet, for lack of a better word, are faced with the problem, which is larger than anywhere else in the world vis-a-vis the banks, and they are now looking at putting in technological solutions upon which they will be able to rebuild at least the systems to be able to do something about the economy of the country.

Now, as long as we get paid outside of Zimbabwe and in US dollars, I am not too sure that I see any real risk. What we have been able to do and now what [Brenda] has been able to do is to negotiate a deal based not only on hardware and sales and card sales and terminal sales but certainly a very high percentage transaction sales. For example, 20% to 25% of the transaction value and one of the transaction value, which is a transaction value in term of what would be charged as an interchange, in other words the 1% or the 2%? Now, once again, either countries like Zimbabwe, which we believe sooner or later will recover, if we can be the full payment system in Zimbabwe long-term that country on its own can also generate huge amounts of revenue.

Now, that's exactly the same model that Brenda is following in all of her other activities from Angola to Morocco. And we really feel that those initiatives are certainly going to bear fruit in the short to medium term and, as I mentioned before, because of what we've managed to achieve we're starting to get now a name, which has got a lot of credibility from the point of view that our systems work, that we have the capacity to implement them in a very, very big fashion and that once they are implemented they are in fact sustainable and they deliver the type of financial services, which are required in the particular country unlike first world country systems that once implemented served very little or no purpose at all.

So I am very excited about that because I think from word of mouth between the different central banks in Africa I think they're pretty much convincing each other that the Net 1 technology is the technology of the future for certainly the African continent.

And then putting all this together, Serge, number one when might some of these new initiatives like Zimbabwe, for example, be signed and what might this mean for earnings in 2010 or 1011?

We obviously are doing the numbers but, you know, once again it's a bit early to talk about that. What we will do though and I did mention it in a little bit during my opening statement, we are now going to over the next three to six months or certainly I am hoping by the end of this year. It will depend very much on Herman and his team in terms of how much capacity they have but certainly we want to start re-segmenting the way that we report on the Company.

We have re-divided or restructured the Company to eight different business units and each one of these business units are going to have their own P&L, which means we will be able to report a lot better on each of the activities of each business unit and to be able to show you what, of course, they are doing at the time on a quarterly basis, yearly basis, year-on-year but also what they're expecting to achieve in the two to three years ahead of that.

So that is something I am hoping will be finished by the end of June and, therefore, we should be able to re-segment and to publish re-segmentation with a little bit of luck by August at the earliest and that, as I say, will depend very much if Herman can actually pull that off.

And then just finally, could you provide some more detail on the new SASSA contract, specifically what is the guaranteed minimum number beneficiaries? Is that above the number you're currently serving? And then, Serge, you mentioned the possibility of winning an additional technology contract with SASSA as well.

That I think, again, it's at least we are very happy that now we have managed to have been demonstrated. At the end of the day we played what could be the most significant and important part in social welfare payments in South Africa and I think that's now being recognized by both the -- to a great extent by the whole South African government and certainly to a greater extent by the new South African government, which I think is very exciting for us. What we believe the new SASSA contract at this point in time is going to bring us, it's going to bring us the time that we require to actually demonstrate and convince the new South African government that, in fact, the tender that we have submitted a year and a half ago is in fact the correct solution for South Africa as a whole.

And we really believe that Jacob Zuma, as the new President of this Country, will definitely look at something of this nature very, very strongly for very simple reasons, namely he has to demonstrate very rapidly that what he has been speaking about to the electorate over the year and a half he can deliver and we certainly can deliver huge amount of that for him, which I think is very, very important, and obviously by doing that, that will give us the opportunity not only to provide technology in my view because the technology is going to eradicate and eliminate a lot of the (inaudible) which will bring back a lot of the money back into the coffers, which is going to allow his government to distribute, what I would call social welfare grants, more fairly to the people that, in fact, should be getting them rather than the number of the people today that are clearly stealing that money because they don't actually qualify.

So I think that position us I believe well above anyone else as the number one contender to grow our customer base, which by the way as you said what is the number that they have given us. The number they have given us is the number that we paid in December of 2008, which means that that number is whatever it was according to the (inaudible) file in 2008 and we believe that because that number is going to grow anyway, simply because they are bringing more people onto the pay file we obviously or in any case during the next twelve months we are hoping to pick up a number of new beneficiaries. So all in all I think the break through is that one, we now are going to have a stabilized government. Two, we will se by Sunday of this week who is going to be the new minister of welfare because we know that (inaudible) has certainly decided not to be part of the new government. In other words, he will not be the Minister of Welfare.

We also know that if that happens the DG, which is the Director General in Welfare, [Abusi Ma Bonsila], is also likely not to be part of the government and all of this could affect, of course, what could happen in SASSA itself in terms of the Managing Director, so we believe that all of this is actually extremely good because it's like anything. You know, if something goes on for too long and people become a bit too blasé, they become a bit too tired about actually doing anything to continue to improve things. They'd rather keep the status quo so a new person coming in in my view is going to look at making his mark and making his means that you go for something that is really trialed and tested.

You certainly don't go out and take a chance, specifically if the solution that's tried and tested also has the potential of certainly making a very, very affirmative impact on millions of people. So we believe we are not back, for lack of a better wording to the number one position and we certainly are going to attempt to capitalize on that fact as soon as the new government or the new cabinet has been appointed.

Dave Koning of Baird.

Yes hey, guys, nice job. So I guess first of all, just on the mechanics of the new contract I just wanted to make sure I understand it. It sounds generally like a net neutral contract from a total economic standpoint. It looks like the two million or so per quarter that you pay in interest expense to pre fund, that's going to go away but then you'll basically have lower I guess revenue in the transaction segment by about tow million per quarter as well, just in the form of reduced pricing. Is that the best way to think about it?

Dave, that's a bit more complicated than that because the previous pricing models were so diverse and in each one of the different provinces and we -- let's call it average revenue per unit was hugely divergent. We -- obviously when we did the negotiations with SASSA went through an exercise in terms of which we tried to average out the average revenue per grant initially, then through a beneficiary. SASSA ultimately to settle on a per beneficiary amount, bearing in mind that typically there is a 10% to 15% variance between the number of grants that get paid and the number of beneficiaries that get paid, depending on the province, of course, again.

So in the end we settled on a per beneficiary amount and the net result of this will be that the revenue number, as well as the operating profit and the margin for this specific activity will be slightly flat or could decrease. Obviously, again, depends on whether there is an aggressive increase in the number of beneficiaries and they, by the way, the formula differentiates between the guaranteed number of beneficiaries, which we obviously believe isn't a number that we will fall below in any event.

Obviously if we do, it doesn't change the economics to us but we firmly believe that that minimum number will be at least the number of people that we serve and so that is determined at a specific rate and whatever new beneficiaries we get onto the system will be treated at a slightly different rate in terms of having them added to an existing infrastructure and obviously for us that's good because if any new people are added to the system the variable costs involved to pay those are minimal and our existing infrastructure probably has the capacity to handle another several hundreds of thousands of cardholders before we need to add any fixed capacity or fixed infrastructure.

So the net result, as I said, would be that revenue and operating margin would be -- would probably be slightly less but that we would make up that in terms of the pre funding that interest that we save. And, again, the pre funding interest saving calculation is not as simple or straightforward as it would seem because in some of the provinces or in [Gwazilla] specifically there was a one week repayment cycle in the Eastern Cape. It was a two-week repayment cycle. It depended hugely on whether the payment file was opened on a Saturday or a Sunday or a public holiday or not and so overall our interest expense obviously will decrease. We will be net cash positive all through the month. They will still be an obligation on us or we will still feel obliged to pre fund some of the merchants that assist us with the distribution of the grants but, again, those pre funded merchants effectively have a 24 hour credit period from us, so the pre funding that we do extend to the merchant is again a one day very short receivable.

But on a net basis and, you know, obviously it depends on what the interest rate environment does in South Africa. We've just seen a 1% decrease in our interest rates over here, which obviously if you have cash on hand is not the best thing to happen but be that as it may depending on the interest rate environment we believe that we will be net income neutral in terms of the new contract compared to the previous one.

Okay great. Thanks for all that color. I guess the second thing I think you mentioned on the call and definitely mentioned it in the 10-Q as well that in Iraq you're going to start recognizing some revenues now in Q4 and I think you mentioned license revenue. I am just wondering I guess the amount that you'd expect to start recognizing, is this something that's going to be one or two million per quarter going forward and then does it fall mostly in the hardware/software line to start with and then eventually in the transaction line as well?

Well, it does the -- yes we'll classify it probably as a transaction based activity because we derive a fee that is directly proportional to the transactions generated from the cards and obviously our partner in Iraq is responsible to enroll and issue the cards to the population. We get remunerated as a percentage of the fee that he receives from the Iraqi government for rendering the service. We do know that there's obviously a pipeline of cards that have been ordered. Those revenues in terms of cards, terminals, cash to centers, obviously will fall to the hardware and software segment but over time and looking forward we expect the bulk of the Iraqi revenues to be a transaction based activity and, again, over time the fee will be a function of what ever our partner manages to negotiate with the government, also bearing in mind that it does work on a sliding scale. In other words, the fee is at its highest point for the first, I think it's a million cards that are issued and for every incremental million cards after that our percentage of his income is reduced in a stippled fashion up to I think eight million cars issued after which it remains constant, if I remember correctly.

Okay and then in Q4 this year is there any expectation of kind of what we should think for revenue from Iraq in Q4?

I think that you will see some revenues coming in from Iraq. There's obviously a lot of activity going on at the moment. We can see the transactions coming through our back end system everyday. We have a lot of biometric data at the moment flowing to us, which is an indication that obviously there's a lot of enrollment happening at the moment. It's difficult for us to predict obviously the exact quantum of the amount of cards (technical difficulty).

I saw that in the last quarter during the previous call you remember we had just under a $5 million operating profit, obviously excluding the mobilization that we reported and really the seasonality is primarily a function of the Spar Bank budgeting cycles where the licenses at Spar Bank actually acquire from BGS. They normally do the order that the older that the acquisitions during either December or June because their year end is December and the budget periods go over the year on half year period.

So it's very much a factor of exactly when the Spar Bank licenses are ordered from BGS. But, you know, in the past we've seen that Q2 is by far the most active, followed by Q4, so I would not say that Q4 is going to be anywhere close to Q2 in terms of its contribution or its profitability and, as a result, I don't think that the overall operating profit for the year -- and bearing in mind that we only had BGS into the current year for ten months, I think it's been -- yes, ten months?

I don't think we will cover the amortization of the intangibles. The intangible amortization amount is quite a lot per quarter and obviously over time we hope to change the BGS model from being as lumpy as it is and as seasonal as it is to something that is more of a transaction based model where we are not reliant on the sale of hardware or licenses specifically but where we participate with our partners and in the countries where the DUET systems are implemented on a per transaction basis. But, in the meantime, I think that process will take a couple of years. In the meantime, we will continue to see the sort of lumpy results from BGS.

Overall, we know that we paid a multiple on this business based on its previous year earnings of roughly eur5 million and as with most of our other activities that we do, on an overall basis we obviously believe that we can still grow that business over an annualized basis by at least 15% per annum. So that remains our goal in BGS. There is no doubt that the BGS area, geographical area where they operate, has been fairly hard hit by the economic crisis.

As you know, specifically within the Russian federation and with [TIA's republic] there have been some pretty significant write downs. They have been -- the currencies in those areas have also suffered, particularly against the US dollar as the rand has, but all things being equal and with all the opportunities identified by the BGS management team, new opportunities they certainly appear to be very exciting. They are focusing on the transaction based part of what they can do rather than the once off sales side. So, you know, I think over the next couple of years we will be able to move to a recurring revenue model and something that exceeds on an annual basis the amortization of intangibles.

Great. That's very helpful and then just on the financial services business, jus going forward should we expect revenue in the ballpark of say $500,000 to $750,000 per quarter? How should we think about that, the financial services business? I know it's very small but just for modeling purposes going forward.

The financial services business will -- at the moment comprises now solely of our [UEPS] space lending activity, okay, and this activity we only do in two of the provinces at the moment, being KwaZulu-Natal and the Northern Cape and clearly with our new one-year contract with SASSA, and our negotiations at the moment in terms of the detailed service level agreements that will go with that, we obviously believe that we will have the ability to extend our offering or we hope that we will have the ability to extend our offering. Should that be the case I think our UEPS space lending business yes will increase significantly, bearing in mind that the cost base associated with any UEPS space loan is very, very low. It is an activity that requires very little by way of capital investment.

Other than the investment in the book, it requires very little investment in human resources or in any of the other fixed assets and so, as a result, I think you will see that the margin of the this business will improve dramatically. For now it will remain at least constant of -- in terms of what it was for Q3 but if we manage to extend the activity into any of the other provinces, we will see I think a very dramatic uptick in the contribution of this specific segment.

And going forward in the future, we also have been working over the last year or year and a half really, to re-introduce an insurance aspect into our financial services business, insurance products are highly sort of the specifically in the South African environment that are specifically within the social welfare space where most of our beneficiaries have some form of life insurance and we have been working on re-introducing our own insurance products through the registration of a life license in South Africa. Unfortunately, that process does take a long time but we are hopeful that that will be concluded as well in the near future. So when that happens that will also be included in the financial services segment.

That's it for me. Congratulations on the quarter.

We have time for one more.

Final question comes from [Tom Zifang] of [Lucram].

Getting back to the operating margin on the hardware side, because the second quarter is going to be materially different than the other three quarters, can you give us some guidance or direction of how volatile it will be? In other words, it looks like the second quarter was in the high 30s but shall we expect the fourth quarter to be break even and the other two quarters to be materially negative?

I don't think that we should look -- and you know, from the onset let's exclude the amortization of intangible assets. So, you know, if we're looking at the pure operating margin of the hardware and software business, there is no doubt that Q2 will remain if the BGS contribution remains as seasonal as it is, a very lucrative or high margin quarter. However, if you look at the previous years, and you look specifically at the 2008 results when we had the Ghana implementation, whenever we have a project of the magnitude of Ghana where there is a large component of software sales and systems integration, that has the ability to also increase the operating margins dramatically within that specific segment.

On the flip side, we also include in this segment other businesses that we have within Net 1 and we rarely talk about them but they also play an important role of what we do. As an example, we have the sale of sim card modules; we have a plant in South Africa and we produce quite a number of those. We also sell sim card licenses around the world. We sell crypto graphics services to the South African banks. And then, of course, we have a lot of the activities related to [Neg Bank] in South Africa, where we provide them from time to time with their hardware requirements but we also provide them with software consultancy services, so having said that, the -- it's very difficult to predict from quarter to quarter the overall product mix within the segment. And so it will remain I think very volatile between the range of 10% in some quarters to 50% in other quarters but I think on an annualized basis we would still aim to at least achieve a 50% margin overall within our hardware and software sales program.

One, five or five, zero?

One five, so between the target is 30%, three, zero percent, but with that ranging from 10% to 50%, depending on any given quarter what exactly the product mix is in that specific statement.

Just to be clear, the target operating margin pre-amortization for BGS should be 30%, three, zero?

For, well that's for the entire segment.

For hardware, software yes.

Yes but for BGS if we look at the history and you look at specifically the financial that we filed as part of our 8-KA when we did the acquisition historically the margins within BGS have been between 50% and 40%, obviously pre-amortization, so we would expect that to continue in the medium term.

Okay thank you very much.

Ladies and gentlemen, that was our final question. Mr. Belamant, would you like to make some closing comments?

Yes, well thank you. Well, on my side I would like to obviously thank all of you for attending the call today. We certainly believe that we have achieved another good quarter and certainly we see no reason -- in fact, we believe that we are perhaps better placed than every before to accelerate our growth due to market conditions, which funnily enough, are actually favorable to us in many different countries, specifically with the question marks over the financial services industry and the banks the way they are today and, more importantly, because of our restructure, which I certainly believe is going to allow us to attack markets in parallel rather than to be sometime serially infected through management restrictions so I really believe that we are certainly in an upturned growth path and that things are looking very good for the Company in the medium to long term.

Thank you very much, all of you, for attending the call and we will be talking soon to you again, as I said, as quickly as possible. Thank you very much for your time. Bye, bye.

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