Lesaka Technologies Inc (LSAK) 2011 Q1 法說會逐字稿

Good day and welcome to the Net1 first quarter results. All participants are now in listen-only mode and there will be an opportunity for you to ask questions after today's presentation. If you should need any assistance during the conference, then please signal an operator by pressing star and then zero. Please also note that this conference is being recorded.

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

Thank you, Dillan. Good morning and good afternoon to our investors around the world. Thank you for joining us on our first quarter fiscal 2011 earnings call. With me today are Dr. Serge Belamant, our Chairman and CEO, and Herman Kotze, our CFO.

Both our press release and Form 10-Q are available on our website, www.net1.com. As a reminder, during this call we will be making forward-looking statements and I request you to look at the cautionary language contained in our press release and 10-Q 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 a reconciliation of these non-GAAP measures to the most directly comparable GAAP measures.

We will be discussing our results in South African rand, which is in non-GAAP measure. We analyze our results of operations in our 10-Q and our press release in rand to assist investors in understanding the underlining trends of our business. As you know, the Company's results can be significantly affected by currency fluctuations between the U.S. dollar and the South African rand.

With that, let me turn the call over to Surge.

Thanks very much, Dhruv. Good morning, good afternoon to all of our shareholders. I'd like to begin with a strategic overview followed by an update of the key trends of the business and then I'll hand over to Herman, who will discuss our financial performance in more detail. To summarize our first quarter 2011 results, we reported revenues of $64 million, a year-over-year decline of 2% in U.S. dollars and 7% in constant currency.

Fundamental EPS for Q1, 2011 was $0.36 down 20% in dollars and 24% in constant currency. This quarter was adversely affected by a new contract with SASSA, which pressured both revenue and profitability.

While we were able to recover a substantial portion of lost revenue through our core transaction base businesses, including EasyPay in Iraq as well as the inclusion of the MediKredit and FIHRST acquisitions, our profitability was pressured by lower economics on the SASSA contract and limited contributions from our acquired businesses during the quarter.

Our Hardware and Software segment, which includes Net1 UTA, continued to adversely impact -- to be continuously impacted by economic and business transformation pressures, although Net1 UTA did deliver higher hardware sales to its existing customers when compared to a year ago.

As of September 30th, 2010 we had $200 million in cash on the balance sheet. Operating cash flow during the quarter was $30 million while capital expenditure was a small amount of $0.8 million.

Before I discuss our growth strategy and the trends in our business, let me spend a few minutes on our SASSA contract as well as our acquisition of KSNET. Our new contract with SASSA is effective for the nine months period from July 1, 2010 to March 31st, 2011. The methodology, including how we get paid that is a fixed fee per beneficiary pay with a guaranteed minimum of beneficiaries, is consistent with our previous contract. As previously disclosed, we did, however, offer SASSA certain concessions in our current service level agreement.

The two primary changes to the terms relate first to the fees we charge, which we agreed to lower by 10%; and second, the guaranteed minimum number of beneficiaries, which were set 10% lower than our previous contract to reflect the actual number of beneficiaries we have been paying monthly over the period of six months. During the first quarter of 2011, we added a net of $12,000 beneficiaries. While the beneficiary increase was not material to our financial performance in Q1, it was the first quarter in last six in which we have seen a sequential increase in a number of people paid.

Last quarter we expected personal and structural changes to be made within SASSA and the Ministry of Social Development during 2011, which in our view could lead to a more specific long-term governmental direction. Early last week the Ministry of Social Development replaced its Minister, Edn Molewa, and appointed a deputy Minister, Bathabile Dlamini to the post of Minister. Meanwhile SASSA has also announced its intention to replace its Chief Executive Officer although no appointment has been made to date.

Our preliminary discussion with the new source of development dealership is really encouraging and we look forward to having on going dialogue with SASSA and the other governmental organizations on developing a long-term solution for the distribution of Social Welfare grants in the whole of South Africa.

Given that we are now less than five months from the expiration of the contract with SASSA with both SASSA and the Ministry of Social Development undergoing a leadership change, it appears unlikely that any long-term solution will be finalized prior to March 31, 2011. We therefore anticipate that over the next few weeks and months the focus of our dialogue with government will likely be around a further 12 months extension of our contract.

Finally, to reiterate once again, should the preferred long-term African result in a competitive tender process, we are like that the advantages over the banks, post office remain our technology, infrastructure and track record particularly in rural areas, which accounts for over 80% of our beneficiary base. Additionally, we have migrated approximately 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 (a) reintroduce cash while making ATM withdrawals upon the resource of accessing funds, (b) require pensioners to travel significant distances at their own expense and see potentially funds for the cost of distribution from government to the pensioners themselves.

Moving on, we are very pleased to close our acquisition of KSNET in Korea at the end of October for KRW270 billion. KSNET, one of the leading providers of card processing in Korea, is well positioned to sustain its industry leading growth in profitability on the standalone basis, while also helping Net1 diversify its revenue earnings and product portfolio. We fully expect to capitalize on certain synergistic opportunities with EasyPay, Mobile Virtual Card and leverage a platform to pursue additional opportunities in the region. It is too early to provide more specific details at this time but, as we integrate the businesses, we will provide additional color on the trends as KSNET, as well as the initiative identified by management teams.

I would like to take this opportunity to formally welcome KSNET executives and employees to the Net1 family. Let me now read the reiterate the Company's growth strategy. First, we will continue to pursue further opportunities within South Africa by leveraging our infrastructures to penetrate new and adjacent markets like payroll, health care claims possessing and financial services. Second, we will seek to continue to globalize our technology by pursuing a disciplined approach to new markets. And finally, we shall endeavor to commercialize our newer technologies like our Mobile Virtual Card and our EasyPay standalone kiosks.

Management is focused on accelerating growth in these key areas and we will hold our business unit leaders accountable to much higher standards. We will continue to focus on strategic acquisitions and partnering with global companies to drive higher adoption and penetration.

We launched our first commercial deployment of our Mobile Virtual Card technology two months ago with Metro PCS, the fifth largest wireless operator in the United States. Our initial launch was only with a new and existing Blackberry devices and the [VC pay application] was pushed out to tens of thousands of handsets in September and October. As a soft launch, given the single handset model rolled out and limited marketing campaign, we have been encouraged with the initial response from the several hundred customers that involved and used the application [assessments] on offer.

During the second quarter of fiscal 2011, we will expand our program to additional handsets and operating platforms to coincide with Metro PSC's launch of their new devices. We will also begin to offer broader reload options for consumers including direct deposit and ACH transfers from the user's bank account rather than purely the cash loading offered today. As well as the roll out of new [services] will be accompanied by a comprehensive web, mail and SMS promotional campaign by Metro PCS.

Our overall pipeline of new opportunity remains very healthy and includes project pursuit by Net1 UETS, Net1 UTA, MediKredit, as well as our other businesses. Getting certain approvals and fulfilling regulatory requirements has taken longer than our original expectation but not completely surprising, given the nature of some of the emerging markets we operate in. We expect to finalize at least one or two of these projects 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 processing for us is not [mirroring] the switching of a particular transaction but rather to add value to these transactions that pass through all our managed bar systems. While providing value added services, we have an opportunity to move up the chain, the value chain, thereby creating the potential to improve both revenue and profitability.

Our acquisitions of MediKredit and FIHRST fit in a few more pieces of the puzzle by getting us access to financial transactions linked to the medical industry including off the top doctors, pharmacies and of course, medical insurance providers as well as the administrators. In addition, FIHRST provides us with access to many hundreds of employers and a base of more than 800,000 employees to which we can market the value-added products and financial services.

EasyPay continues to gain market share, posting 14% year-over-year transaction growth during the fourth quarter. EasyPay benefitted from volume gains in value-added services, such as bill payment, insurance, loans, prepaid utilities and airtime. During the first quarter EasyPay was awarded a tender for prepaid electricity with one of the three largest municipalities in the [Hampton] Province and added a further 15 bill issuers to its network. Looking forward, we will continue to drive adoption and value-added services, reach out to second tier retailers, additional municipalities for prepaid utilities, increase our roster of available billers and create revenue synergies with our MediKredit and FIHRST offerings domestically.

During the first quarter of fiscal 2011, we also launched our EasyPay-branded cash accepting kiosks at multiple locations in government offices, hospitals, schools , etcetera, where users can load cash onto a mobile phone account and leveraging our Virtual Card technology, purchase goods and services including prepaid airtime, pay bills and send remittances. We guarantee at opportunity 20 kiosks deployed and in the first two months have seen transactions that you process via the kiosk increase over 400% on a month-over-month basis. Assuming that this trend continues, we will deploy several thousand kiosks across the country during the next years, total strengthening our distribution network in the country. We believe our kiosks also enable us to move up the transaction value chain in turn driving accelerating growth at EasyPay.

Additionally, in South Africa, MediKredit was awarded a contract for processing an insured patient's claim at [Harthens] Public Hospitals. South Africa, we also signed an agreement with FNB Bank, West Bank and Shell to replace the existing managing draw-based fleet card system with Net1's biometrically secured SmartCards, a solution that allows fleet owners to identify drivers and vehicle, routes and logistical monitoring, as well as traditional fleet services such as a purchase of fuel, oil and vehicle-related services in an on-line or in an off-line environment.

We begin deploying Net1 biometric terminals in the fiscal quarter one, 2011 and should commence card issuance in the second half of fiscal 2011. We have already rolled out 600 after the 1,500 terminal ordered in 160 out of 600 Shell forecast. We expect the rollout to be completed by February 2011. Due to the success of our technology card solution, Shell together with FNB are evaluating the implementation of the technology in other African countries with an immediate focus on Botswana and Numidia.

Internationally we continue to deploy 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 system capable of helping them achieve financial inclusion by improving the lives of their citizens, reducing, forward and increasing efficiencies. Once again, payment systems that do not provide added functionality, such as proof of life, standalone read detection [recognizing] personal security tax collection, pension contribution management, wage and welfare payments and a promotion of savings are no longer deemed adequate or capable in terms of achieving the goals set by individual governments. Our UEPS is designed to explicitly help emerging economies achieve these objectives, making it a more compelling solution than traditional payment systems.

In Iraq [NUETS] continues to assist their strategic partner ISC, the Iraqi Government and state-owned banks to deliver secure payment solution to more and more Iraqis. In addition to the payment of social grants, our partners were awarded a new project to distribute salaries to 400,000 military personnel. The registration enrollment in SmartCard issuing software application in respect to the Ministry of Defense had to be modified to include our unique off-line processing capability to enable military personnel to be registered and issued with SmartCards in rural environments, where there is no network coverage or network access is not [viable] for security reasons.

The software upgrade has been completed and tested by both NUETS and ISC. Final sign off by the responsible parties within the Ministry of Defense is imminent, which will then enable rollout of the cards to the military personnel. The payment of salaries must also be performed off-line, but securely, a unique feature of our UEPS system when combined with our robust biometric identification technology.

In addition, our process has been awarded a further 15 provinces in which they will now distribute grants to all victims. To date, over 1.8 million UEPS SmartCards have been issued to beneficiaries after out of the 3.45 million SmartCards ordered. This number includes the recent order of 1.2 million cards, which will be delivered in batches of 200,000 cards per month commencing end of November 2010 to end of April 2011.

NUETS is thus well positioned to continue growing its transaction based recurring revenues. As the card base increases, the deployment of EFT POS devices becomes paramount in order to ensure that transacting points become more and more prevalent resulting in NUETS receiving an additional order for a further 2,000 biometrics EFT POS terminals valued at $1.3 million. Net1 expects to deliver 500 of these devices by end of November and 50 made ready in early January 2011.

This order will increase the number of installed EFT POS terminals to more than 5,000 in Iraq. In Ghana our UEPS driven by our business development team in NUETS continues to flourish through the launch of new and innovative products such as banking on the 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 agreements with GIPSS, the Ghanaian Interbank Payment and Settlement system, to launch our new mobile technology that will deliver customers the functionality that the UEPS affords, as well as complete interoperability between our UEPS cards in the mobile phone.

NUETS is currently in negation with local Ghanaian partners to become the technology arm of the new entity establishing Ghana to manage the operation of this business. NUETS will own and operate the mobile technology, which interface to the e-switch UEPS mainframe and will be able to chart transactions fees on all of the transactions that originate from mobile phones. This initiative is driven by GIPSS wishing all banks and mobile networks to implement, promote and use the technology. Positive discussions are underway with some of the mobile operators in Ghana for the purpose of providing integration to their systems for the sale of electronic account vouchers directly from client mobile phones, merchant mobile phones as well as GIPSS UEPS point of sale devices.

NUETS, together with an African focused company that is a leader in depot benefit administration, is working with the Ghanaian Government, Pension Fund Administrators to solve the problem associated with data collection and management of contribution from all employees and employers alike. This project when finalized will mandate the NUETS or NUETS solution to all 33,000 employers that would have to install a secure data collection system to manage pay and reconcile all pension contributions as prescribed by government.

NUETS will earn revenue through the sale of the software application, the required hardware for employers and pension administration offices as well, as a percentage of the transaction fee levied in respect of the administration of the contribution data. NUETS are in the final stages of partnering with an international remittance company to manage the distribution of remittances into territories that have deployed our UEPS solutions. Our UEPS international remittance solution is extremely cost effective and offers convenience to recipients and they are able to collect their funds securely with biometric verification at any bank branch and all merchant stores participating in the system.

Our systems provide that is in line with anti-money laundering requirements are reporting daily on any large amounts or infrequent deposits being made to the UEPS SmartCard. Our solution eliminates the operational costs associated with the appointment of agency outlets and is currently the norm used by many transfer agents.

NUETS activities in Malawi continue to increase with the delivery of the 100,000 UEPS SmartCards to be issued by the Malawian Rural Finance Company during October and November 2010. An additional cardholder was recently received for 50,000 Opportunity Bank Cards with delivery expected by the end of November 2010. Number of cards sold in Malawi now exceeds 750,000. This initiative will go a long way for NUETS to convert what has been a lucrative hardware and software sales business into a long-term sustainable and reoccurring revenue model.

To conclude, I am bullish about Net1's long-term prospects, given the pipeline of opportunities we see with Mobile Virtual Card, international UEPS deployment, KSNET, MediKredit and EasyPay. We expect to remain an integral supplier to the South Africa Government for the distribution of social grants and will seek to capitalize on any long-term opportunities as they present themselves.

With that, let me turn it over to Herman. Herman.

Thank you, Serge. I will discuss the key results and trends for the first quarter of 2011 compared to the first quarter of 2010. My discussion will be based on our results in South African rand, as this provides the best indicator for now of the Group's actual operating performance. In order to review our quarterly results in U.S. dollars and in U.S. GAAP, please review our Form 10-Q and our press release filed yesterday evening.

For Q1 of 2011, our average rand/dollar exchange rate was 741 rand compared to 782 a year ago and positively impacted our U.S. dollar by its results. Any fluctuation in the rand obviously influences the dollar equivalent results of operations, which is why we provide you with constant currency information in our press release as a clear indicator of our operating drivers.

For Q1 fiscal 2011 in constant currency, our revenue decreased 7% to $64 million, and our fundamental earnings per share declined 24% to $0.36. As previously announced, our new sets of contract effective July 1, 2010 negatively impacted revenue and profits during Q1 of 2011 with most of the reduction in revenue falling to the bottom line.

The comparability of our operating income year-over-year was impacted by favorable currency movements in our functional currencies, mainly the South African rand and a number of one off items that are excluded from my discussion so these one off items include an unrealized foreign exchange loss of $2.6 million, mainly caused by SEC contracts entered into to settle the KSA purchase price and transaction related expenses of $3.4 million during Q1 of 2011.

Intangible asset amortization increased year-over-year due the inclusion of FIHRST and MediKredit and is also excluded from my 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 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 first quarter of 2011, we reported revenue of $64 million, a decrease of 7% in constant currency and 2% in U.S. dollars. Similarly, fundamental earnings per share of $0.36 in the first quarter of 2011 declined 24% in constant currency and 20% in U.S. 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 off items and intangible asset amortization 32% during the first quarter, down from 45% a year ago, primarily due to lower economics in our South African pension and welfare business.

Before moving on to our segments, I want to touch briefly on the increase in our SG&A expenses in Q1 of 2011. SG&A expenses during the quarter increased 62% year-over-year in constant currency to $50 million, of which half the increase, or about $6 million, was related to the non-recurring items highlighted previously, mainly the unrealized foreign exchange loss and transaction related expenses related to the KSNET acquisition. The balance of the increase is largely due to the inclusion of the MediKredit and FIHRST businesses, which have lower margins, and our legacy transaction processing operations.

Within the segments transaction based activities posted revenue of $45 million during Q1 of 2011, 5% lower in local currency and flat in dollars, as lower revenue from SASSA was largely offset by the inclusion of revenues from MediKredit and FIHRST and increased contribution from EasyPay and Iraq.

In Q1, 2011 our acquisitions of MediKredit and FIHRST together contributed just under 7% of total revenue. In constant currency segment operating income excluding amortization increased by 34% from Q1 2010, while operating margin declined 18 percentage points to 43% due to the lower profit margins in pension and welfare and at MediKredit and FIHRST businesses. In addition, we also incurred additional stock up expenditure related to the launch of our mobile virtual card initiative in the United States.

Moving to our operating metrics, during Q1 of 2011 our pricing for pension and welfare declined in line with the expectations outlined in our new SASSA contract effective July 1st, 2010. In the first quarter we processed a total of ZAR2.9 billion (inaudible) on a completed pay cycle basis representing 1% year-over-year growth. The productivity of our 4,772 installed terminals declined to 985 transactions processed per POS device during our completed pay cycle from 1,044 during Q1 of 2010 due to the addition of 244 more POS devices over the past year in line with the increased demand for merchants to offer this important service to their customers.

In Q1 of 2011 EasyPay processed 174 million transactions with an approximately value of ZAR57 billion, an increase of 12% compared to 153 million transactions worth ZAR53 billion processed a year ago. The increase is primarily due to an increase in value added transactions in the quarter and FIHRST processed 5.5 million transactions worth ZAR15 billion and MediKredit processed 2.5 million transactions worth ZAR1 billion during Q1 of 2011.

Our Smart [Credit] Card segment product count segment boasted revenue of $8 million in Q1 2011, a 6% year-over-year decline in constant currency. The total number of active smart credit cards was 3.6 million, a decrease of 6% from last year but up 20,000 from last quarter. Operating margin for the segment remains consistent at 45%.

For our Financial Services segment revenue in Q1, 2011 increased 49% year-over-year in constant currency to $1.2 million, principally as a result of an increase in the number of UEPS loans provided. Segment operating margin in Q1, 2011 improved to 74% from 67% in Q1 2010, mainly due to the higher underlying profitability in our UEPS based lending activities.

Our final operating segment is Hardware and Software with 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 Q1 2011 was $10 million, representing a 17% year-over-year decline in constant currency. The decrease was due primarily to cyclical pressure on certain commodity hardware products we sell, fewer hardware sales to Ghana and Iraq, but partially offset by higher revenues at Net1 Austria.

The ever changing contributors to this segment cause volatility in operating margin from quarter-to-quarter. Operating margin, excluding intangible asset amortization for the segment decreased to minus 3% from 7% in Q1 2010, due to pressure at Net1 Austria and UEPS and certain hardware commodity products. During Q1 of 2011 we generated cash flow from operations of $50 million and incurred capital expenditures of $800,000.

As of September 30, 2010 we had $200 million of cash and cash equivalents on our balance sheet. On October 29, 2010 we closed our acquisition of 98.7% of KSNET in Korea for KRW270 billion or $240 million based on exchange rates at the time of closing. We tendered the acquisition with $124 million in cash and $116 million through a five-year senior security facility with a consortium of Korean banks led by Hana Bank.

Broadly the terms of the debt financing include an interest rate of the prevailing local CD rates plus a margin of 410 basis points or roughly 7%. Approximately half the facility will be repaid on October 29, 2015 and the other half will be paid in eight equal installments half yearly commencing October 29, 2011. The facilities are secured by the KSNET assets and shares worth we acquired in KSNET and its holding company. We are currently preparing the pro formal financial information for KSNET as well as the purchase price allocation and plan to release the information during January 2011.

The business remains cash generative and I remain comfortable that we have strategic liquidity between our cash and short-term facilities to fund our working capital requirements. Our priorities for uses of cash remain strategic acquisitions, share buybacks and decrease payments. Our acquisition pipeline remains active and we will continue to look opportunistically at strategic deals that will enable us to accelerate growth and profitability. Our fully distributed share count for Q1 of 2011 was 45.4 million shares, down from 48.9 million shares a year ago.

Given the fact that that our new serviceable agreement with SASSA runs through March 31, 2011, it remains difficult to provide guidance for the full fiscal year. However, assuming the contract were to run for the duration of fiscal 2011, we still expect to generate constant currency fundamental earnings per share of at least $1.50, given that our first quarter is traditionally one of our weakest.

In conclusion, even though our pension and welfare revenue and profitability will be lower during fiscal 2011, we expect to see continued growth and contributions from KSNET, UEPS in Africa and Iraq, EasyPay, MediKredit and FIHRST for the balance of the year.

With that, operator, please open the line for questions.

(Operator Instructions). Our first question comes from [Tim Boyce] of Baird.

Nice job, nice start to the year here. Just had a couple questions on the SmartCard, in the SmartCard segment you actually saw accounts grow sequentially for the first time in I think six or seven quarters. Do you guys expect that trend to continue or should we expect maybe to see a small sequential decline going forward?

Tim, that's obviously a good question. That all links back to the -- well, two things. One obviously is the SASSA contract and the other one is the other activities that we are I think finally getting off the ground in terms of signing up new customers that themselves are going to also have a SmartCard but what you're seeing there I think is I think SASSA has probably reached the stage where all of the people they wanted to remove from the payment file that exercise I think has been pretty much competed at this point in time, which means that two things are now happening. One is that a lot of the people that we removed are coming back on, simply because they were never meant to be removed. There may have been a question mark on their eligibility so we can expect I think a fairly large percentage of those people to come back on, so I think that's point number one.

Point number two I think under the prior leadership of SASSA and the Minister that's currently been replaced, there was quite a lot of pretty strong drive towards moving some people across to the post office and the banks and I think that has proved to be sometimes futile in the rural areas whereby moving people to banks has created even longer queues at ATMs that do not get replenished with money on time. That's created a lot of traveling on behalf of the pensioners and it also moves the economic activity away from the rural areas and our President, Jacob Zuma, certainly has stated that part of the plan of the ANC is to ensure that in fact economic activity would not move from rural to urban and therefore, the debt activity has got to remain in place.

And in my view, that is a very good sign because that would imply that the migration, or what at the time almost looked like almost a forced migration, from people from what I would call is real rural territories to semi-urban to urban territories where banks could lay a role. I think it slowed down tremendously and that I think is going to move back numerous customers back to our system, where they felt far more comfortable in any case in the first place. So I think I expect to see continuous growth, perhaps even accelerating compared to what we've seen in the last three months, simply because of the new Minister.

One has to understand the new Minister was the Deputy Minister so she's well aware of what was happening within the Ministry and within SASSA and I think she has in our view a different view to what needs to be achieved per view, which I think is far more in line with President Zuma's direction for the Country as a whole. So, all in all, I think that bodes well for us in terms to perhaps pick up people that were eliminated simply because the deemed to be not eligible and these are going to come back. On top of it, I think we're going to see a lot of pensioners that open bank accounts moving back to our system simply because it's more convenient, more secure and actually gives them the chance to actually continue to transact in the areas where they live.

Thanks. That was really helpful I assure you. And I guess, turning to EasyPay, a little surprised that about the easy pay margins this quarter, was that really just a function of rolling out the kiosks and should we really see that in those margins around 40% continue from I think kind of the mid 50s previously?

As I said, yes there have been a couple of changes in the mix, changes in the mix, with the product mix of EasyPay. The kiosks are starting to have an impact there so I think what you'll see going forward is that the margins at easy pay will probably be slightly lower than you would have seen in the past. From a percentage point of view obviously the quantum of the operating profit should decrease in line with the increase in revenue specifically but we are looking at specific product mix changes within the EasyPay environment as we roll out all sorts of new value added services and some of those are our lower margin services than the ones that we had in place before.

Obviously the transaction switching component of EasyPay also remains relevant. Probably less, just slightly less than half of EasyPay's activity still revolves around the straight EFT switching capabilities of the switch and that obviously runs at a much lower margin than the other value added services so what you see over time is, as we introduce certain value added services products, that margin will be under pressure but in overall quantum terms both the revenue and the operating profit of EasyPay will increase.

Okay and then I think historically EasyPay has generated somewhere in the ballpark of ZAR0.20 to ZAR0.22 per transaction and, as you add on value added transactions over the next couple years, could price per transaction start to gradually move higher?

Yes certainly I think it will. Bearing in mind that the ZAR0.22 is obviously a blended average, there is no doubt obviously that the business of switching pure debit and credit card transactions [APR] is becoming more of a commodity actually on the global scale and that our pricing level will always be under pressure, specifically from the larger retailers. There's no doubt that this is a line item that they constantly look at but we believe that actually with the bundling of our value added services with our transaction processing service we have the capability to make sure that our average cost or profits per transaction will remain at least constant and hopefully grow over time.

Okay and then lastly, just on the Hardware segment I think Q2 is seasonally the strongest quarter for UTA and I think that you have some new Iraq POS orders that could hit in Q2, so I am assuming that Q2 in terms of hardware would be a little bit elevated from the Q1 level but could hardware still operate at a loss in Q2 or just given the strength should we at least expect some contribution to the bottom line?

No for Q2 you're right. Q2 has always been traditionally our strongest quarter, bearing in mind of course that traditionally, especially at Net1 Austria, the bulk of the sales to the [Spare Bank] customer base used to be in the second quarter. At the end of the calendar year when most of the budget was really allocated and spent, that's time to make an obviously change with the change in Net1 Austria's client base over the last year or so. But, having said that, I still believe that with the current base there and with the activities at UEPS in Ghana and in Iraq and some other places with the order pipeline that we're seeing will result in a positive contribution from the hardware and software segment in Q2.

Okay thanks a lot, guys, nice start to the year.

(Operator Instructions). [Johan Debrain], Emerging Markets Investment.

Thanks for the update. Just one question from my side and that is really about the competitive landscape in South Africa and in the negotiations of that SASSA tender. We've heard -- I mean, I understand that the banks and the post office are the traditional competitors and would be part of any kind of new tenders or new sort of future solution but what about the new technology providers, guys like [BLU Telkom], mobile phone operators and the new technology that's coming out on sort of mobile platforms? Is that a significant threat to you? Do they have the right security and do they have the right solutions in place and could that not affect your competitive position in that space?

Well, that's again it's a very good question and there's no doubt that we have to keep on looking out for anything that is new. We ourselves, as you know, also have a mobile offering and a mobile solution. Now, however, we've got to understand that the Social Assistance Act dictates to some extent what the technology as a basis should be able to do. What's interesting is that over that you probably are aware that over the years both the banks and the post office have always tendered for at least a piece of this and they have never won any tender, simply because the technological solutions simply do not encompass the requirements as they are tabulated by both the Act, which is the Social Assistance Act, as well as the effective norms and standard that have been defined that must be followed in order to be able to participate in the distribution of grants.

For example, Barometric Technology is a must. The banks don't do it and right now I am not aware that there is anybody with a cell phone that has built one or at least have seen a few with barometrics or at least fingerprint readers on the cell phones but basically don't exist or are not prevalent so that in its own right already makes it very, very difficult for any of these technologies to be used purely because they do not meet the basic criteria that's required in order to enter this game. There are other things, of course, that come into it, which also means that you have to have back end systems that are capable of managing the distribution of grants in the way that again must be managed according to the Social Assistance Act.

For example, money does not get even to your pensioner if the pensioner cannot prove that he is alive so you need to be able to supply his proof of life. You also have to give the money back if after three months of pensioner, for example, has not taken the money or used the money, that money must be paid back to in fact to SASSA. So if your systems are also not capable to manage these particular operations, then you are never going to be able to win a particular tender. Now bank systems can do it and there's absolutely no doubt that there is no cell phone company today that has created any system that remotely would meet 10% tendered. So yes we have to keep an eye on what they do.

What we believe makes more sense is for us to try to integrate this type of technology into our existing solutions if, of course, that particular integration would still mean that our system would be compliant to the requirements of government. And that I think will take a lot of time because you might even find that either the norms and standards or the act itself might have to be changed in order to accommodate some of these new technology considerations.

So for now and for the future, in my view, for the next couple of years it's still very much going to be let's very much use what is there and test it and working and let's improve on that rather than to try to see if we can't come out with something completely new, which has absolutely no track record and could destroy a particular infrastructure in the system that works very, very well. You must remember that paying beneficiaries in South Africa is absolutely paramount one, from a human point of view and social point of view, but it's probably even more important from a political point of view. So it's not something that you experiment with for lack of a better word.

Okay thanks for that. Just who are the other competitors that have the rest of the market share in that space, who there that has that you share the total sector space with?

There's really only two other players and only one of them, which is pretty large compared to us, which I mean if we have let's say 40%, 45%, 50%, they probably have 35% and that's AllPay. And, as you know, AllPay is owned by ABSA, which is really Barclay, so they are really the ones that have competed with us in places like the Eastern Cape and other places like the Western Cape, which is more urban rather than rural. So they tend to have been able to do certain things in the urban areas rather than the rural areas.

The problem that they face is that they continuously, because they are a bank, they continuously move towards rather to use the banking infrastructure, which as you know in rural areas is non existent, but more importantly the solution that they are employing is really [mixed wrap] base or with a pin number, which unfortunately does not meet the requirements of the norms and standard and does not exit and cannot meet the Social Assistance Act, so this is becoming quite a big, big problem and only in fact a couple of weeks back we were having a discussion with the Central Bank is South Africa in [Pretoria] and in fact that particular issue came up where the question was well, should the banks be paying any social grant at all because of the fact that they do not meet the basic requirements.

So this has all been thrown open into a bit of a pot and I think something is going to have to be changed in order to really make sure that the banking infrastructure can be used at all. Otherwise, it will simply have to be cut off and they will have to basically take themselves out of that market in totality.

Okay thanks very much.

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

Well, yes well all I would like to say is that this is the first quarter of a new year. We know that last year we went through some tedious times, specifically with renegotiating of our SASSA contract. We feel very positive that we are making headway and that our new Ministry or change in Ministry or change in administration at SASSA is certainly going to give us another opportunity to actually once again put on the table the reasons why our technology and our system should be used on a national basis, simply because it makes sense for us technology wise as well as financially it makes sense as well.

We know the Treasury is also involved to a great extent at looking at these particular solutions and we feel quite confident that we will continue to play a major role in this particular business, simply because we don't believe that there is anyone else that today has the capability, the expertise, the track record, the experience or the technology to actually compete with us in this market on a large scale. So I actually envisage that although that might be opportunity tedious for our shareholders I think it's a question of being patient.

Very often in developing economies things can take time. The right people must be put in place in order to be able to actually move forward and we know that sometimes it is frustrating. I can assure you it's as frustrating for us as well as it is for you but we still believe that the Company with the bits and pieces of the puzzle that we are building will continue to grow and I think in time will certainly deliver, I believe, the right returns for the people that have stuck to it.

So I'd like to thank you all very much for attending the call and we certainly look forward, certainly in the New Year, to see you all in the United States. So thank you very, very much for your time.

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