Lesaka Technologies Inc (LSAK) 2010 Q4 法說會逐字稿

Good afternoon, and welcome to the Net1 conference call to review the fourth quarter and annual results. All participants will be in listen-only mode, and there will be an opportunity for you to ask questions at the end of today's presentation. (Operator Instructions). Please also note that this conference is being recorded.

I would now like to turn the conference over to Dhruv Chopra. Please go ahead, sir.

Thank you, Dylan. Good morning and good afternoon to our investors around the world. Thank you for joining us on our fourth-quarter and full-year 2010 earnings call. With me today are Dr. Serge Belamant, a Chairman and CEO and Herman Kotze, our CFO. Both our press release and Form 10-K are available on our website at www.Net1.com.

As a reminder, during this call, we will be making forward-looking statements and I request you look at the cautionary language contained in our press release and Form 10-K regarding the risks and uncertainties associated with forward-looking statements.

In addition, during this call, we will be using certain non-GAAP financial measures, and we have provided reconciliation to these non-GAAP measures to the most directly comparable GAAP measures. We will discuss our results in South African rand, which is a non-GAAP measure. We analyze our results of operations in our 10-K and press release in rand to assist investors in understanding the underlying trends of our business. As you know, the Company's results can be significantly affected by currency fluctuations between the US dollar and the rand. With that, let me turn the call over to Serge.

Thank you very much, Dhruv. Good morning to you all on the website and good afternoon to the rest and possibly good evening to some of the people. I would like to begin with a strategic overview followed by an update on the key trends in the business before handing over to Herman, who will discuss our financial performance in greater detail.

To summarize our fourth-quarter 2010 results, we reported revenues of $69 million, which is a year-over-year increase of 11% in US dollars and 2% in constant currency. Our core transaction-based businesses continued to grow, and during the quarter were also aided by the inclusion of the MediKredit and FIHRST. However, our Hardware and Software segment, which includes Net1 UTA, used to be called BGS, continued to be adversely impacted by economic and business transformation pressures, thankfully, some of which was offset by good sales NUETS in Iraq and Malawi.

Given persistent economic challenges faced by the segment and the delays in Net1 UTA signing its first transaction-based customer, we recorded a goodwill impairment charge of $37 million. Fundamental EPS for quarter for 2010 was $0.54, up 42% in dollars and 30% in constant currency.

As of June 30, 2010, we had $154 million in cash on the balance sheet. And before I discuss our growth strategy and trends in our business, I think it is important that we first address our new contract with SASSA, which is not effective for the nine-month period July 1, 2010 to March 31, 2011.

While the methodology including how we get paid that is a fixed fee per beneficiary paid, with a guaranteed minimum number of beneficiaries, is consistent with our previous contract we did offer SASSA certain concessions in account service-level agreement. With two primary changes in the terms, relating first to the fees we charge, which we agreed to lower by 10%; and second, the guaranteed minimum number of beneficiaries which were offset 10% lower than our previous contract to reflect the actual number of beneficiaries we have been paying monthly over the past six months. While the number of beneficiaries we pay has declined for the past five quarters, over the past two months, we have begun to see modest gains in beneficiaries paid.

South Africa has been put under austerity measures. They have met the cancellation of many social benefits, which were found to have been granted without proper consideration or approval. In addition, reduction in fees were inundated to all ground distributors to reduce the overall cost of ground administration. We expect personnel and structural changes to be made within SASSA during 2011, which we hope will lead to a more specific governmental direction and to which we can align ourselves in order to continue to play a very significant role in this market segment. We continue to have discussions with SASSA and other governmental organizations in an attempt to identify the most efficient long-term solution for the administration of social grants.

Should the preferred outcome result in a competitive tender, we highlight that the advantages of banks and post office very much remain our technology, infrastructure, and of course, our past track record, particularly in the rural areas, which account for 80% of our beneficiary base.

Additionally, we have migrated opportunity 45% of our beneficiaries to an electronic model, thereby reducing the amount of cash in the system. Conversely, using either the banks or the post office, would one, reintroduce cash by making ATM withdrawal the primary source of accessing funds; two, require pensioners to travel significant distances at their own expense; and three, potentially transfer the cost of distribution from government to the pension. None of the above are preferable to pensioners or [candidate] to the government.

Let me now outline the Company's growth strategy. First, we will pursue further opportunities within South Africa by leveraging our infrastructure to penetrate new and adjacent markets, like payroll and healthcare claim processing.

Second, we will seek to globalize our technology by pursuing a disciplined approach to new markets.

And finally, we shall seek to commercialize our newer technologies with our mobile virtual card.

Over the last two years, the pace at which we have delivered on some of these growth initiatives and diversify the Company has been below par and not acceptable to the Net1's executive leadership. Management is focused on accelerating growth in these key areas, and will certainly hold all of our businesses and units and business unit leaders accountable to higher standards.

We will continue to focus on strategic acquisitions and partnering with global companies in order to drive adoption and market penetration.

We're extremely pleased to announce our first commercial deployment of our Mobile Virtual Card technology in the US with a wireless operator. This program is expected to launch on September 1, 2010. And we expect to make a formal announcement next week. We have our banking, processing, issuing, and distributions already in place, such that effective September 1, our technology will be available for consumers to download and transact. This [long] implementation should also be critical to discussions we have had with a number of other potential customers who have been waiting for our first commercial launch.

Our pipeline of opportunities, which remains very healthy and includes projects being pursued by N UETS and Net1 UTA.

Getting certain approvals and fulfilling regulatory requirements have taken longer than our original expectations, but not entirely surprising given the nature of some of the emerging markets we operate in. We expect to finalize a couple of these projects certainly during fiscal 2011.

I will now discuss some of the trends in our domestic and international operations. In South Africa and in general, for that matter, transaction purchasing for us is not merely the switching of a particular transaction, but rather, to add value to these transactions that pass through or are managed by our systems. By providing value--added services, we have an opportunity to move up the value chain, thereby creating the potential to improve both revenue and profitability.

Our acquisition of MediKredit and FIHRST fitting a few more pieces of the puzzle by giving us access to financial transactions, linked to the medical industry, including hospitals, doctors, pharmacies, and of course, medical insurance providers and their administrators.

In addition, FIHRST provides us with access to many hundreds of employers and a base of 750,000 employees, to which we can market our value-added products and, of course, our financial services.

EasyPay continues to gain market share, posting a 13% year-over-year transaction growth during the fourth quarter. EasyPay benefited from volume gains in value-added services [that ship] bill payments, insurance loans, prepaid utilities, and airtime, as well as a [modest benefit] from retail spending during the World Cup.

Looking forward, we'll continue to drive adoption of value-added services, reach out to second tier retailers, additional municipalities for prepaid utilities, increase our roster of valuable billers, and create revenue synergies with both our MediKredit and FIHRST offerings.

For first quarter of fiscal 2011, we are also launching our EasyPay-branded cash-accepting kiosks at multiple locations in government offices, hospitals, schools, and the like, where users can load cash onto a mobile [pullet] card and leveraging our Virtual Card technology, purchase goods and services, including, of course, prepaid airtime, pay bills, and send remittances.

Over the next two years, we should have several thousand kiosks spread across the country and we will further strengthen our distribution network in South Africa. We are of the opinion that this initiative would allow EasyPay to grow at a much far greater rate than it has in fact achieved in the past.

In South Africa -- we have also signed an agreement with First National Bank, West Bank, and Shell to replace the existing (inaudible) based fleet card system with our Net1 biometrically secure smart cards. The system is called [POS]. Our solution allows fleet owners to identify drivers in vehicles, routes and logistical monitoring, as well as traditional fleet services, such as a purchase of fuel, oil, and vehicle-related services in both an online and off-line environment.

We began deploying Net1's biometric terminals in fiscal 2011, quarter one, and should commence card insurance in the second half of fiscal 2011. 100,000 cards have already been placed on order.

In the same line, we have recently been awarded tender by Chevron that will require us to implement our [EFD port] solutions in more than 800 Chevron fuel and retail sites.

We will provide the necessary hardware and software solution, including our FlexiLANE product, together with switching reconciliation and settlement services. In addition, Chevron will offer a package of value-added services to their clients.

EasyPay will generate revenue, provide terminal rental, as well as transaction fees, including a percentage of the [acquiring] fees charged by the acquiring bank.

Internationally, we continue to deploy our UEPS system, such as those in Iraq and Ghana and to capitalize on new market opportunities.

While sales cycles can be long for our UEPS systems, more and more, developing economies are focusing on new payment systems capable of helping them to improve the lives of their citizens, reduce [fall] and increase efficiencies.

Once again, payment systems that do not provide added functionality, such as proof of life, manual [and ready] detection mechanism, personal security, tax collection, pension contribution management, wage and welfare payments and the promotion of savings, are no longer deemed adequate or capable in terms of achieving the goals set by individual [parliaments].

Our UEPS is designed to explicitly help emerging economies achieve these objectives, and this is what makes it a far more competitive solution than traditional payment systems.

In Ghana, our UEPS system, driven by business developed [in the US] continues to flourish through the launch of new and innovative products, such as banking on a bus, which allows customers to perform their banking functions while traveling to their destination. And card to person, which was designed to provide a secure methodology to deliver remittances in deep rural areas.

In addition, NUETS has reached an agreement with GhIPSS, which is the Ghanaian Interbank Payment and Settlement System, to launch a new mobile technology that will deliver customers the functionality that the UEPS affords as well as complete interoperability between a UEPS card and, in fact, mobile phones.

NUETS will own and operate the mobile technology, which will interface to the gives UEPS mainframe and will be able to charge transaction fees on all the transactions that are incepted on mobile devices.

This initiative is driven by GhIPSS that [we issued] all banks in mobile networks to implement, promote and use the UEPS technology.

NUETS is also working with the Ghanaian government, pension fund administrators to solve the problem associated with the collection and management of contributions from all the employees and employers alike. This project, if realized, will make the NUETS solution necessary for all 53,000 employers that will need to install our secure data collection system to manage, pay and reconcile all of their pension contributions as mandated by government.

NUETS will also, in this case, earn a transaction fee through the sale of software packages and the necessary hardware to all employers, as well as transaction fee based on the amount of money transferred.

These initiatives will go a long way for NUETS to convert what has been a very lucrative hardware and software sales business into a long-term, sustainable, and recurring revenue model.

In Iraq, NUETS continues to assist the government and state-owned banks to deliver secure payment solutions to more and more Iraqis. Our partners in Iraq have been awarded a new project to distribute salaries to a further 400,000 military personnel. The payment of these salaries is to be performed off-line, but securely, a unique feature of our UEPS system combined with our robust biometric identification technology.

In addition, our partners have also been awarded a further 15 provinces in which they will now distribute grants to all war victims. This new initiative led to several cardholders of 1.2 million, as published last month, which really should -- will further increase NUETS transaction-based recurring revenues.

NUETS activities in Malawi have also increased with new cardholders in excess of 100,000 to be used by the Rural Finance Company, as well as three of the most active UEPS user banks, namely Opportunity Bank, Nedbank, and [Indabank]. The newer cards sold in Malawi, although a small country, now exceed 750,000.

Now that we have bidded down a SASSA contract and, although that, we continue to engage government as to the [work forward], we will now be in a position to better focus on business development activities both locally and internationally.

To conclude, I am very bullish about our VCC technology due to its elegant simplicity, and in the way it can be implemented and can work anywhere in the world.

In addition, the harshness of the financial crisis, as in my view, made many governments rethink the risks associated with traditional banking systems and force them to research alternative solutions that are more robust and that will deliver the functionality that will assist and improve the lifestyle of their citizens. Herman, over to you.

Thank you, Serge. I'll discuss the key results and trends for the fourth quarter of 2010 compared to the fourth quarter of 2009.

My discussion will be based on our results in South African rand, as this provides the best indicator of the group's actual operating performance.

In order to review our annual results in US dollars and in US GAAP, please review our Form 10-K and our press release filed yesterday evening. Our press release filed yesterday provides a summary of our quarterly results.

For Q4 of 2010, our average rand/dollar exchange rate was ZAR7.56 to the dollar compared to ZAR8.26 a year ago, and positively impacted our US dollar-based results. Any fluctuation in the rand obviously influences the dollar equivalent results of our operations, which is why we provide you with constant currency information in our press release as a clearer indicator of our operating drivers.

For fiscal 2010 in constant currency, our revenue decreased 3% to $280 million, and our fundamental EPS increased 17% to $2.01. Despite the pressures we faced in our pension and royalty segment, we reported moderate operating income growth during Q4 of 2010. The comparability of our operating income year over year was impacted by favorable currency movements and a number of one-off items, which are excluded from our discussion to follow.

These one-off items include a goodwill impairment of $37.4 million for Q4 of 2010 and the profit on the sale of our traditional micro lending business in Q4 of 2009.

Intangible asset amortization has decreased year over year, and this amortization is also excluded from our discussion below.

We use a non-GAAP measure called fundamental earnings per share, which eliminates some of these one-off items that impact year-over-year comparisons. We typically exclude the effects of irregular tax changes, amortization of intangibles, stock compensation charges, and unusual non-operating or non-cash flow items when we calculate this measure.

On a consolidated basis, for the fourth quarter of 2010, we reported revenue of $69 million, an increase of 2% in constant currency and 11% in US dollars. Similarly, fundamental earnings per share of $0.54 in the fourth quarter of 2010 grew 50% in constant currency and 42% in US dollars.

We measure the group's profitability by looking at operating income and margin by segment. On a consolidated basis, operating margin, adjusting for one-time items and intangible amortization, was the same at 43% during the fourth quarter.

Moving to our segments, transaction-based activities posted revenue of $50 million during Q4 of 2010, up 17% in local currency and 28% in dollars, and includes revenues from MediKredit and FIHRST and increased contribution from EasyPay and Iraq.

The number of EasyPay transactions processed increased 13% to $167 million. In constant currency, segment operating income, excluding amortization, increased by 6% from Q4 of 2009 while operating margin decreased 600 basis points to 54% due to the lower profit margins of the MediKredit and FIHRST businesses.

As a result of our new SASSA contract pricing and guaranteed minimum volumes, our future operating margin and income will be significantly lower.

Moving to our operating metrics during Q4 of 2010, our pricing for pension and [royalty] remain consistent with the prior three quarters. In the fourth quarter, we processed a total of ZAR3 billion through our network on a completed pay cycle basis, representing 7% year-over-year growth. The productivity of our 4,794 installed terminals declined to 999 transactions processed per POS device during a completed pay cycle from 1,076 transactions during Q4 2009, due to the addition of nearly 370 more POS terminals over the past year, in line with the increased demand for merchants to offer this important service to their customers.

In Q4 of 2010, EasyPay processed 167 million transactions with an approximate value of ZAR55 billion, an increase of 13% compared to 147 million transactions worth ZAR32 billion processed a year ago. The increase is primarily due to an increase in value-added transactions in the quarter.

FIHRST processed 5.3 million transactions worth ZAR14 billion and MediKredit processed 2.7 million transactions worth ZAR1 billion during Q4 of 2010.

Our smart card account segment posted revenue of $8 million in the fourth quarter of 2010, a 6% year-over-year decline in constant currency. The total number of active smartcard accounts was 3.5 million, a decrease of 9% from last year. Operating margin for the segment remained consistent at 45%.

For our financial services segment, revenue in Q4 2010 increased 42% year over year in constant currency to $1.2 million, principally as a result in the increase in the number of UEPS loans provided.

Segment operating margin, excluding the impact of the profit on sale of the traditional micro-lending business, and a once-off debt and write-off related to the sale in 2009, for Q4 of 2010, improved to 79% from 55% in Q4 2009, mainly due to the higher underlying profitability of our UEPS-based lending activities.

Our final operating segment is hardware and software, which traditionally includes Net1 UTA and revenues that occur on an irregular once-off basis, which makes it difficult to predict sales and margins from year to year.

Segment revenue in Q4 of 2010 was $10 million, representing a 57% year-over-year decline in constant currency.

The decrease was due primarily to cyclical pressure on certain commodity hardware products we sell, nonrecurring revenues from Ghana during Q4 of 2009, and lower revenues from Net1 UTA.

The ever-changing contributors to this segment caused volatility and operating margin from quarter to quarter. Operating margin, excluding goodwill impairment and intangible asset amortization, for this segment decreased to negative 11% from 3% in Q4 2009 due to pressure at Net1 UTA, and certain hardware commodity products.

During Q4 of 2010, we generated cash flow from operations of $16 million and paid taxes of $32.5 million, resulting in an overall net cash usage from operating activities of $13.8 million. We also include capital expenditures of $400,000 and purchased FIHRST after cash acquired for $9 million.

Year to date, we have generated $69 million in cash flow from operations while incurring $2.7 million in CapEx.

As of June 30, 2010, we had $154 million of cash and equivalents on our balance sheet. The business remains cash generative, and I remain comfortable that we have sufficient liquidity between our cash and short-term facilities to fund our working capital requirements.

Our priority for uses of cash remain strategic acquisitions and buybacks. However, the eventual allocation of cash will be predicated on the quantum of acquisition opportunities. Our acquisition pipeline is active, as we believe that it's of strategic importance to diversify our business globally.

Our fully distributed share count for Q4 of 2010 was 45.6 million shares, down from 55.6 million a year ago.

Given the fact that our new service-level agreement with SASSA runs through to March 31, 2011, it is difficult to provide guidance for the full fiscal year. However, assuming the contract were to run for the duration of fiscal 2011, we would expect to generate constant currency fundamental earnings per share of at least $1.50.

The reduced pricing and volume in the new contract is expected to have a 13% to 15% reduction of our fiscal 2010 consolidated revenue base. And our comments and EPS guidance assume that the lost revenue flowed through to the bottom line.

In conclusion, even though we expect our pension and welfare revenue and profitability to be lower during fiscal 2011, we expect to see continued growth from UEPS and Africa and Iraq, EasyPay, MediKredit, and FIHRST.

With that, operator, please open the call up to questions.

(Operator Instructions). [Tim DePause], Baird.

Good morning, guys. Congratulations on the renewal. Just, I guess to start, to go back to your comments, Herman, the 13% to 15% reduction in revenue, is that an organic reduction or does that include the contributions from FIHRST and MediKredit?

No, that's an organic reduction in terms of -- if we take the consolidated revenue base for that segment, as it gets -- or for the group as it was reflected for 2010, we -- the 13% to 15% is the consolidated reduction that we foresee. And, if we had to look at it from a segmental point of view or from a pension and welfare business point of view, it follows that what Serge mentioned as a 10% reduction in price and a 10% reduction in volume, the effect on that specific business is around 20%.

Got you. And then just in terms of the MediKredit and FIHRST contribution, do you have those for the quarter, and maybe what you expect for those revenue contributions in fiscal 2011?

It's Dhruv. I think for fiscal 2010, the combined businesses contributed about 4% of revenue. And beyond that, we haven't provided any guidance in terms of what their contributions will be for fiscal '11.

Okay. That's helpful. Thanks. And I guess, looking at the guidance, you do have $100 million authorization per share buybacks outstanding. Does that at least $1.50 number you are talking about, does that include any share buyback assumption?

No. It assumes that the share count remains pretty constant at this point in time.

Okay. And then I guess finally for me, in terms of free cash flow, typically it's been a little higher than fundamental EPS. I know there were some changes and there were some tax payments and working capital adjustments in Q4, but on a normalized basis, do you expect free cash flow to still be in line to above fundamental EPS on an annual basis?

We do. You know, as a general world, we expect to have at least 100% cash conversion ratio on the fundamental EPS or adjusted EBITDA levels. There are some timing differences that can be quite significant. And we have seen some of those reflected in the year-end accounts, specifically as they pertain to our settlement assets and settlement obligations. Those movements can be pretty material depending on pay cycles in the pension and welfare business as well as in FIHRST specifically, and in MediKredit. But you know, if we average out those timing differences, there is no reason why our cash conversion ratio shouldn't remain at that 100%.

Okay. Thanks a lot.

Tom McCrohan, Janney Capital Markets.

Thank you and good afternoon. I also congratulate you guys for renewing the contract. (multiple speakers) -- yes, what is the next milestones in connection with your dealings with SASSA?

Well, I think perhaps to give you a guys what Dhruv calls a little bit of color, I think at the end of the day, one, I think we have to understand that to renew this contract for a further nine months was let's say a little bit difficult. And there are a number of reasons for that.

One, I talk about the austerity measures. The government certainly was bent on seeing if they could not keep a little bit more money in the process by squeezing all of the service providers, and we're not the only ones involved.

Two, one of the things that I did mention is that on a monthly basis, SASSA is being, for lack of a better word, I'm going to use the word eliminating -- it's probably the wrong word because they're still alive -- but certainly removing thousands and thousands of people from the welfare net, simply because it appears that they have identified a huge amount of perhaps corruption, and a huge amount of fraudulent activities, which has been published. I think we have made the point over the last nine months of negotiations that our systems are very much capable of preventing that type of fraud from occurring again, or even that type of corruption from even being implemented.

So, I think although there's been tedious process to sign, the benefit, apart, unfortunately for the 10% loss, has been, in my view, that it has allowed us to expose our system and to reveal some of the aspects of our system to other departments in government, that were not really involved directly in social welfare.

Finance (inaudible) has taken a very keen interest in what we do, which I think is very, very, very important, because at the end of the day they do hold the purse strings. And I think that, over the next year or so, in my view, will prove to be invaluable in terms of what will happen next, which is what I want to get and what you want to know.

So, all in all, I think it's been a bit tough. We talked about 10% reduction. We talked about 10% reduction in numbers. We must understand, however, the 10% reduction in numbers does not necessarily mean that we're not going to pay more people over the nine months than the minimum number. And, obviously, any amount of people that we will be paying over that minimum number is obviously not taken into consideration in our calculations.

So the 10% reduction in numbers may prove not to be 10%. On average over nine months it might only be 5%. It might only be 3%, depending how quickly a lot of the beneficiaries that were taken off the [FOS] either are reinstated or how many new beneficiaries are likely to come back on.

We've already seen over the last few months that from losing beneficiaries on an ultimate basis, we are not gaining beneficiaries, and we were losing 30,000, 40,000 a month. So the turnaround from minus 30,000 to minus 40,000 to plus 10,000, 15,000 is quite a huge jump. If that continues, we are certainly hoping that in fact our beneficiary base will continue to grow over the next nine months rather than impact go down, therefore, minimizing the so-called 10% loss due to beneficiaries. So we've got to keep that in the back of our mind.

Number two, going forward, we understand clearly that SASSA's objectives and that was published many, many times, was to perhaps go once again on tender because as you know, two years ago, 2.5 years ago now, they had in fact decided not to proceed with the previous tender, that in fact we had won, and we had won on a national basis. And that is, again, something that was actually published.

Now, what seems to have transpired now is that between treasury and SASSA, they have to sit together and decide if they should go to tender once again? But then the question will be, what are they going to ask for in this tender that they did not ask in the previous one? Because, if the tenders are similar, it might be far easier for them to appoint a new adjudication team and to reevaluate the previous tender and the tender replies or responses rather than in fact to go through a lengthy process of re-tendering.

If we go through a lengthy process of re-tendering, I think I'm pretty sure that we will be going into a further extension starting 1st of April of next year, considering we've only got nine months to go and it is unlikely that they could possibly go to tender, evaluate an award of tender, sign a service-level agreement and, in fact, have an opportunity to actually implement the topic of the tender whoever it would be that would win it, it would be impossible to actually do it by the end of March of next year.

So I think they realize that if they really want to save a lot of money, there are two areas to do it. One it's economies of scale, namely we can't split this country into 10 different pieces and hope that when you put them together, you get a price which is as effective as what we have proposed by doing the entire country. That's one.

And two, when it comes to the preventing of fraud and the elimination of corruption, it cannot be done as a split tender. That particular functionality has to be done on a national basis. Otherwise, people will start playing the game between provinces or between departments or between offices.

So I'm of firm belief that what we have proved over the last -- since October of last year, since the beginning of the negotiation of the extension, I think everybody is aware that our system now, from a physical point of view, can say the [fiscal is] in excess of ZAR2.5 billion per annum, and that they will never be able to achieve by any other means. And I think the people in treasury know this.

So, worst-case scenario, it will be a tender again, which unfortunately will lead to an extension, and us probably winning the tender.

Best case scenario will be the reopening of the tender that we've already won, in which case it would simply be a question of them awarding it back to us, where it belongs. So, I don't know if that gives you any real clarity to it, but it's the best I can do so far.

That's very helpful. Thank you for all that color. My last question is just on the partnerships and acquisitions side. Can you just give us -- what your thinking is on partnership. Is it strictly pension and welfare? What type of partner are you looking for and in what geographies? That would be helpful. Thank you.

I think when we talk about partnership, one thing we are realizing is that unless we're going to start spending millions and millions of dollars in marketing our technologies throughout the world, which we have never been great believers in, or we have never been the type of people that believe in it, we now identified, for example, companies such as the Stratus Corporation that realize that that system is all [one on] Stratus, and there seems to be no reason whatsoever why the Stratus people should not go out in all [the due sales Stratus's] to sell or rather an application that runs on the Stratus, namely us.

And that is something that NUETS has already progressed and in fact it has already been put into place, and that's starting to bear a little bit of fruit where we're starting to gain inquiries that do not come directly from us, but are coming through, for example, the Stratus Corporation.

The same thing applies to, for example, terminal supplies. Again, NUETS is working in 30 closely association with people like [Very Fund], as well as Ingenico, as you know the [two] really largest terminal manufacturers and suppliers in the world, that they themselves are attempting today to move away from hardware sales and to move into a transaction sort of based model.

It is unlikely they will be able to do that very, very easily without actually linking with people (technical difficulty) to which they can not only sell hardware but also build themselves into some sort of a transaction fee.

And once again, there's one of two countries which I cannot mention right now that we are, in effect, trying this model with one of the two companies that I've just mentioned. And certainly that is again starting to bear a little of fruit because it makes certainly the infrastructure costs of deploying point-of-sale fundamentally cheaper, but it allows of course the terminal manufacturers to actually recoup that money over a longer period of time as a transaction fee. So it seems to help us to sell our systems, and it helps them to get into the transaction fee business. So again, terminal manufacturers is another group of people that we look at.

And then, the third group of people that we are certainly now looking at very, very seriously are mobile operators. Because as you know, some of them certainly are operational in many, many different countries, and some of them 10, 12, 14, 20 countries.

And, therefore, it makes sense that if we can penetrate a market, for example, in Ghana, where mobile technology seems to be now or at least our mobile technology seems to be well received and well pushed by basically the government where is GhIPSS, which is really the interbank system in Ghana, that would give us the opportunity to implement with the mobile operator that if the system proves to be successful, it would make sense for them to simply pick it up and to simply implement it or import it into the other countries in which they operate. So certainly it's another big group of people that we are looking at to actually work with us.

It's a long shot, and I am saying that more in jest than anything else. But we have been in many conversations with people at MasterCard that of course, we have been speaking to because of our VCC product, and that have been against my actually anticipation, I think very supportive and very helpful to grant us the waivers that we require, both in the US and South Africa, to launch our VCC products.

And I think through them, when they view an opportunity as well that we can perhaps, with our technology, fill in a little gap that perhaps exists in their own technology solutions, and of course, if we could have something with them on maybe a little bit, on a bigger scale, that could be a huge advantage for us to deploy technologies such as VCC. So I'm talking about that type of partnerships.

That's helpful. Thank you.

Sean Cain, Morgan Stanley Smith Barney.

Hi. First, I want to thank you guys for having a Q&A session on this particular call. Going back to the Iraq, the additional card order, the 1.2 million, can you give us any idea what kind of -- excuse me? Can you give me any idea what kind of revenue numbers you're looking for (multiple speakers) those additional cards?

Once again, what I think last time, Dhruv did explain the model a little bit. The way it works in Iraq is that -- and again, it depends on the market we go into. If that's likely to be a salary and wage payment. So this is something that happens monthly.

If what we are distributing happens to be social welfare grant or war victim grants or that type of nature, they tend to pay the people every second month. The reason why they do that now believe it or not is not because they want to. It's because they simply don't have the infrastructure to be able to pay everybody every month. So they tend to split it, but we pay every second month. We're paying everybody else every second month, which makes it easier for them in terms of infrastructure.

Now, we get paid a transaction fee whenever money is loaded onto the card, and we get paid a transaction fee whenever money is removed from the card, either because of cash -- in other words, let's call it the cash back facility, or because the transactions are made at a point of sale at the merchant, where the merchant would be paying an acquiring fee for lack of a better word. So we make transactions like any other bank would be making transactions today or a credit or a debit card.

Now obviously, we are talking 1.2 million cards, of which 400,000 are now going to be distributed to basically military personnel, which is a new contract [that rather than God]. The other 800,000 cards are going to go into the traditional war [victim] distribution that get paid every second month.

It normally takes about three months from the time that the card is issued to the time that the first payment is made simply because you have to register the people; you've got to collect the fingerprints; we've got to run the one too many search to make sure that we eliminate duplicates. They've got to do the on -- let's call it a local check that the people in fact are not doing anything that they're not meant to do.

Remember that everything has to be done in their attic. So at the end of the day, takes about two to three months before the first payment. And then every second month after that we will receive a fee plus to load and to spend.

Now that fee, at the very lowest mark, is around the $0.80 to $0.20, and we expect that fee, as of course people start using the technology, then we go not only to load and to withdraw cash, but start going to point-of-sale, we believe that fee can easily get into the $0.50's and the $0.60. That, obviously, will take -- that will take over a period of time.

On top of it, we also believe that the people that are getting paid every second month will start being paid every month, therefore automatically doubling the fees that we are making out of that base of customers.

So I think that not only the growth that you are seeing in Iraq in the numbers of cards issued, but the fact that right now we are probably paying the majority of people every second month that could become every month, and therefore, double our normal revenue, that we currently do; plus the expansion into other transaction types in my view gives us a fantastic growth rate and path in the Iraqi market.

That's very helpful. When you all let these press releases out, it would be sometimes helpful to put a little bit of that color, the word that we're using today a lot, into those releases. And maybe you all will consider that on your September 1 announcement that you are telling us is imminent.

The other thing is, concerning the basic UEPS technology, can you give me an update on the Philippines?

On what?

On the Philippines.

Oh, the Philippines at this point, we have two or three initiatives. You probably know one was Indonesia; the other one was Philippines.

The Indonesian venture was run by our BGS acquisition, and the other one is run through NUETS. Both of those -- and I still believe it's a lot going on and it will be going on for quite a while -- but in fortuity, both of these countries seems to have not a lot in some [context] South Africa, into other few hiccups, either because of government changes, ministerial changes or very often investigations into the way that certain tenders or certain contracts are awarded.

So at this point, both of these things are on hold, but not on hold with are we believe they are dead; on hold from the point of view that we are waiting for the new team to enter the fold. And in Indonesia I know that has already happened, where the people have already picked up the baton and are starting to reopen the folder. And in Philippines we're waiting to know who are going to be the people that are going to be given the data.

Okay. And what about Russia?

Russia is a different animal entirely. (multiple speakers) still have of course 80-odd people that work on a day-to-day basis within the Russian territory and not only Russia but the whole CIS. We still believe that Russia, for us, specifically with what we call our new sort of EMV UEPS-enhanced product, which is something that has been received at least in the Russian market very, very well. I don't know if you know, but with State Bank, people have made the decision that they would like to go for an EMV standard as the solution, but not necessarily a branded solution. And they're looking for a type of a local MasterCard, Visa equivalent based on EMV, but that would be something that would not necessarily be branded as a MasterCard or Visa, which gives them the opportunity, then, to add to that product the functionality that is missing in the standard EMV system, allowing them to achieve what it is that they been achieving with the previous technology called NUETS that allows them to actually work in deep rural areas in an off-line manner.

So, that is something that they are certainly looking at right now very, very, very, very seriously. And the product that they are now evaluating is a product called Fusion, which we used to call EMV+, but we felt EMV+ was maybe a little bit arrogant, and might upset our friends at Visa and MasterCard, so we call this Fusion. But it's really an EMV standard with UEPS full team functionality.

Now, the other thing that is happening in the CIS Republic in Russia is, of course, certainly, the introduction of the VCC, or our Virtual Card product. Because as you know, this is something that doesn't challenge anybody. [Funnily] enough, followed every rule that's ever been done or ever made in terms of interchange, in terms of Visa, MasterCard, card-not-present transactions, liabilities, warranties, everything. Nothing changes, and of course it's a product which is going to be far easier for people to actually deploy specifically to safeguard transactions across the Internet, across the telephone, and across any channel that is [selective] or that was completely insecure.

So I think the Russian place for us is still very much a strong one, and this is why we still strongly believe that our partners with Visa, the company that we did buy, called BGS, operating from Austria, [forward in] Russia and the CIS, still can play a massive role to roll out both Fusion as well as VCC for us in those regions.

Okay, great. Thank you, Serge.

Pleasure.

(Operator Instructions). Ben Joseph, Rice Voelker.

Hi, this is Cory Armand with Rice Voelker. What was the effective date of the price reduction under the renewed contract?

It's the 1st of July.

Okay. That's my only question. Thank you.

Gentlemen, there are no further questions.

Okay. Thank you.

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