Lesaka Technologies Inc (LSAK) 2011 Q2 法說會逐字稿

Good day and welcome to the Net1 second-quarter 2011 results. All participants are now in listen-only mode and there will be an opportunity for you to ask questions after 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 second-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 at 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 a non-GAAP measure. We analyze our results of operations in our 10-Q 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 dollar and the rand. With that, let me turn the call over to Serge.

Thanks very much, Dhruv. Good morning to all of our shareholders. We'd like to begin with the strategic overview straddled by an update on the key trends in the business before I hand over to Herman who will discuss our financial performance in more detail.

To summarize our second-quarter 2011 results, we reported revenue of $89 million, a year-over-year increase of 21% in US dollars and 11% in constant currency. Fundamental EPS for quarter two 2011 was $0.39, down 24% in dollars and 30% in constant currency.

This quarter was adversely impacted by a new contract with SASSA, which pressured both revenue and profitability. We also closed our acquisition of KSNET and its results have been included for two months of the quarter.

The decline in revenue from SASSA was more than offset by the inclusion of our KSNET, MediKredit and FIRHST acquisitions, as well as growth in our core transaction-based businesses. Our profitability was pressured by the lower economics on the SASSA contract and lower margin profiles of our acquired businesses during the quarter.

As of December 31, 2010, we had $71 million of cash on the balance sheet. It includes $124 million of our cash to fund a portion of the KSNET acquisition with the balance of $116 million funded with a five-year debt facility in Korea.

Operating cash flow during the quarter was negative $8 million and affected by provisional tax and secondary taxation on Company payments of $31 million.

We recognize that our Company may appear complex due to its multiple business initiatives, as well as to how these initiatives combine to form a unified business strategy. We have thus decided to clarify our communication strategy to the market by highlighting the businesses that are currently established and the largest contributors to our bottom line, as well as those that have the potential to become material businesses for us over time.

First, we are focused on our established transaction-based businesses, which are or have the potential to generate at least double-digit growth on a consistent basis over time. This subgroup includes our pension and welfare business, referred to as the CPS, EasyPay and now of course KSNET. Together, these businesses currently account for roughly 75% of our total revenue on a pro forma basis.

The second subgroup we classify as growth businesses that may not be as material to revenue and earnings today, but that, in our view, have the potential to grow at a rate materially faster than our established businesses over time. Our growth businesses include Net 1 UETS, MediKredit, FIRHST and Net1 UTA and together, these businesses currently account for just under 15% of our total revenue on a pro forma basis.

The final subgroup is classified as startup businesses and primarily includes Net1 Virtual Card. These will be businesses Net1 management believes have the potential to grow into material businesses for the Company over time.

To reiterate the comments I made last quarter, management is focused on accelerating growth in these key areas and we will hold our business unit leaders accountable to our standards and have subsequently restructured our incentive compensation structure to be more heavily linked to driving profitable growth.

This being said, let me begin by discussing the current status of our SASSA business. In January 2011, our contract with SASSA was extended for a period of six months to September 30, 2011 under the same terms and conditions of the existing contract.

SASSA has indicated that it intends to commence a new tender process and complete its evaluation before the end of September. To date, SASSA has not yes issued its RFP, but we believe it could be issued in the next few weeks.

Over the past few months, we have begun to see some personnel and structural changes at both SASSA and the Ministry of Social Development. In November, a new Welfare Minister, Bathabile Dlamini, was appointed and we expect new leadership to be appointed at SASSA shortly.

Our preliminary discussions with the new social development leadership have been encouraging and we look forward to having ongoing dialogue with SASSA and the other governmental organizations and providing a long-term viable solution for the distribution of social grants on behalf of the South African government into the future. For the first half of 2011, the number of beneficiaries paid in our park provinces has remained largely constant since June 30, 2010.

Finally, to reiterate once again, in a competitive tender process, we are (inaudible) advantages over the banks to (inaudible) or any other potential competitor remains 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 by making ATM withdrawals the primary source of accessing funds; B, require pensioners to travel significant distances at their own expense; and C, potentially transfer the cost of distribution from government to the pensioners themselves.

Moving on, we were very pleased to close the 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 very well positioned to sustain its industry-leading growth and profitability on a standalone basis while also helping Net1 diversify its revenue, earnings and product portfolio.

Both Net1 and KSNET management teams are actively engaged in identifying and evaluating revenue synergy opportunities. 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 and metrics at KSNET, as well as the initiatives identified by our management teams.

For the two months KSNET was part of Net1 in quarter two 2011, its financial and operating performance has been consistent with management's expectations. For the calendar year 2010, KSNET posted 22% year-over-year revenue growth and a 24% gain in operating income.

Next, we believe that EasyPay is well-positioned to generate sustained and potentially accelerating growth over the next years. During Q2 of 2011, EasyPay benefited from volume gains in value-added services such as bill payments, prepaid electricity and (inaudible). We continue to gain marketshare not only through volume gains, but also broadening our product offering, expanding distribution and moving further up the value chain.

During Q2, EasyPay signed a new retail chain with a nationwide footprint of 600 locations to provide EFT switching and value-added services and added 60 new bill issuers to our platform. This follows our Q1 initiative in which EasyPay was awarded the tender for prepaid electricity with one of the three largest municipalities in the Gauteng Province [and it is] 15 bill issuers to its network.

In addition, EasyPay has been awarded a new contract to roll out more than 2000 point-of-sale terminals in all of [Chevron], 550 locations. Not only will EasyPay offer Chevron's EFT switching and acquiring services, but also a full suite of value-added services.

Looking forward, we will continue to drive adoption of value-added services, reach out to second tier retailers, additional municipalities for prepaid utilities, increase our roster of available pillars and create revenue synergies with our MediKredit and FIRHST offerings domestically.

At EasyPay branded cash accepting kiosks pilot project launched during quarter one 2011 has grown transaction volume at a compounded month-over-month rate of 58% over the past three months. At the end of December, we had 52 kiosks deployed, largely in the Gauteng area. Given the success of this pilot thus far, we intend to roll out a further 200 kiosks in other provinces over the next six months to authenticate the validity and scalability of this initiative.

Through our kiosk, a user can log cash onto a mobile phone account and leverage our Virtual Card technology to purchase goods and services, including prepaid airtime, electricity, pay bills and send remittances. We believe our kiosks also offer us the opportunity to move up the transaction value chain, in turn driving accelerating growth at EasyPay.

Let me now spend a few minutes on the key [trades] within our newly classified growth businesses. NUETS' African and Middle East focused VPS business development subsidiary continues to assist the growth of its major clients such as Ghana and Iraq. It is clear from the many press releases that have been issued by GIPS the Ghanaian payment and settlement systems utility that our UEPS system is being more and more utilized by organizations that did not previously have access to the existing, but limited banking infrastructure. For those interested, NUETS post these press releases on their website at www.Net1UEPS.co.za.

What is of specific interest is the myriad of applications that are being implemented using our technology to enable the formal sector to participate in the formal economy. These fundamental breakthroughs have led to NUETS being invited to present its product to a number of forums driven by organizations such as the South African Development Bank and the United Nations. In time, we believe that the demonstrable success of NUETS implementation in difficult territories where little or no infrastructure exists will lead to a fundamental change in the way banking is delivered in developing economies.

In Iraq, NUETS' partners are accelerating their drive to deploy many thousands of our biometric point-of-sale devices into merchants' stores. This today indicates that our UEPS technology has been bedded down and is now well accepted by millions of customers as a safe means of transacting for goods and services.

More than 3000 customers are registered today resulting in a system that will now extend into the private sector and will also include non-state-owned banks. We believe that this initiative not only demonstrates the acceptance and usefulness of our system, but its ability to generate additional transactional revenue.

It is clear that although NUETS is not the material contributor to our financial results, it has demonstrated its ability to implement systems, which become national implementations because of the functionality and security these provide to all of its users.

NUETS' business continued to grow as its business model has been migrated to transaction-based revenues. The speed of NUETS growth, however, will be determined by its ability to sign up more territories and to safely navigate amongst the impediments it faces due to the interference of its competitors, as well as our rigorous FCPA, OFAC and SOX compliance rules and regulations that are often received with suspicion by our potential customers and seldom understood.

For MediKredit in South Africa in quarter two, we successfully processed claims for Gauteng Department of Health to process insured or special claims following our tender award the quarter before. MediKredit is also actively pursuing opportunities to process unissued claims across several provinces in the country, giving it potentially the widest (inaudible) of services across insured and uninsured populations of South Africa.

FIRHST continues to expand its base of customers, which now reach 850,000 by the end of the quarter, as well as commencement of initiatives to capitalize on synergies with EasyPay.

Finally, we will discuss the progress in our (inaudible) VCC business. We launched our first commercial deployment of our Mobile Virtual Card technology in mid-September with MetroPCS, the fifth largest wireless operator in the US. Our initial launch was only with new and existing BlackBerry devices and the VCP application was pushed out to tens of thousands of handsets in September and October.

Beginning in mid-December, VCpay began rolling out on MetroPCS new Android handsets, including those from Samsung, LG and Huawei. As a result, the number of handsets on watch VCpay is now available has increased from less than 100,000 at the end of November to half a million handsets this week. We expect the pace of expansion of our addressable market of VCpay enabled phones to continue increasing at a healthy rate. Our focus, however, over the next few months is to drive awareness and adoption.

Both MetroPCS and Net1 are committed to this initiative and we have identified multiple channels through which to target our marketing campaign. Over the last six to eight weeks, we have substantially improved the efficiency of our platform and have also widened our loading mechanism for purely cash loading at MoneyGram's 40,000 locations in the US to currently also being able to load via electronic bank transfers and direct deposits.

Two weeks ago, (inaudible) a leading prepaid industry publication named Net1 Virtual Card as the winner in the best virtual or mobile prepaid, as well as most innovative prepaid program category, providing further validation of our product by our peers in the industry.

To conclude, we are very pleased to have closed the KSNET acquisition, which diversifies our revenue earnings and product portfolios, as well as reduces Net1's dependency on any one single economy, currency or political jurisdiction. We are quite confident of our prospects of playing a major and critical role in the distribution of social grants in South Africa and are encouraged by the continuous growth prospect at KSNET and EasyPay and believe that our less established businesses are laying sound foundations to generate future growth. With that, let me turn over to Herman. Herman, over to you.

Thank you, Serge. I will discuss the key results and trends for the second quarter of 2011 compared to the second quarter of 2010. My discussion will be based on our results in South Africa rand as this provides the best indicator of the group's actual operating performance.

Our press release filed yesterday provides a summary of our quarterly results. For Q2 of 2011, our average rand/dollar exchange rate was ZAR6.94 to the dollar compared to ZAR7.52 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 clear indicator of our operating drivers.

The interpretation of the financial results for the second quarter of fiscal 2011 is complex as these include the KSNET trading results for two months, the impact of the debt raised and related transaction costs for the KSNET acquisition and the change in these (inaudible) economics.

In addition, Q2 of 2011 includes MediKredit and FIRHST, which are not included in the prior-year Q2 results. The acquisition of KSNET has assisted us to diversify many of the risks associated with our business, including currency, customer concentration and country risks.

As previously announced, our new SASSA contract effective July 1, 2010 negatively impacted revenue and profits during Q2 of 2011 with most of the reduction in revenue dropping to the bottom line. 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 my discussion below.

These one-off items include an unrealized foreign exchange gain of $2.5 million and transaction-related expenses of $1.8 million during Q2 of 2011. Intangible asset amortization increased year-over-year due to the inclusion of KSNET, FIRHST 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 effects of irregular tax (technical difficulty) amortization of intangibles, stock compensation charges and unusual nonoperating or non-cash flow items when we calculate this measure.

On a consolidated basis for the second quarter of 2011, we reported revenue of $89 million, an increase of 11% in constant currency and 21% in US dollars. Fundamental earnings per share of $0.39 in the second quarter of 2011 declined 30% in constant currency and 24% 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 50% during the second quarter, down from 44% a year ago, primarily due to lower economics in our South African pension and welfare business.

We have created a new segment mainly as a result of the KSNET acquisition. This segment called International Transaction-Based Activities includes KSNET, Virtual Card and operations related to the NUETS transaction processing initiative in Iraq.

Within this segment, our renamed South Africa transaction-based activities posted revenue of $47 million during Q1 of 2011, 5% lower in local currency and 3% lower in dollars as lower revenue from SASSA was largely offset by the inclusion of revenues from MediKredit and FIRHST and increased contribution from EasyPay.

In Q2 2011, our acquisitions of MediKredit and FIRHST together contributed just over 9% of total revenue. In constant currency, segment operating income, excluding amortization, decreased by 33% from Q2 2010 while operating margin declined 18 percentage points to 43% due to the lower profit margins in pension and welfare and at MediKredit and FIRHST businesses.

Moving to our operating metrics, during Q2 2011, our pricing for pension and welfare declined in line with the expectations outlined in our new SASSA contract effective July 1, 2010. In the second quarter, we processed a total of ZAR2.7 billion through our network on a completed pay cycle basis, representing a 1% year-over-year decline. The productivity of our 4823 installed terminals declined to 959 transactions processed per POS device during a completed pay cycle from 980 during Q2 of 2010 due to the addition of 153 more point-of-sale terminals over the past year, in line with the increased demand for our merchants to offer this important service to their customers.

In Q2 2011, EasyPay processed 188 million transactions with an approximate value of ZAR43 billion, an increase of 11% compared to 174 million transactions worth ZAR59 billion processed a year ago. The increase is primarily due to an increase in core transactions and value-added transactions in the quarter.

FIRHST processed 5.7 million transactions worth ZAR18 billion and MediKredit processed 2.2 million transactions worth ZAR 1 billion during Q2 of 2011.

Let me just correct the statement we made before regarding the contribution of MediKredit and FIRHST. It is 9% of total segment revenue, not of total overall revenue. Our International Transaction-Based Activities posted revenue of $17 million during Q2 of 2011. KSNET contributes the majority of the revenue and operating income in this segment.

In addition, we also incurred additional startup expenditure related to the launch of our Mobile Virtual Card initiative in the United States. Integration of KSNET into the Net1 family is progressing well and we hope to provide useful operating metrics for this business in our 10-K in August 2011. The current key indicators for KSNET comprised the operating margin at 17% and the EBITDA margin at 28%. These margins may fluctuate over time as KSNET has to invest in point-of-sale terminals and review agent commissions continuously to remain competitive and retain and grow its market chain.

Our Smart card account segment posted revenue of $8 million in Q2 2011, a 4% year-over-year decline in constant currency. The total number of active Smart card accounts was 3.5 million, a decrease of 4% from last year, but relatively flat over the last two quarters. Operating margin for the segment remained consistent at 45%.

For our Financial Services segment, revenue in Q2 2011 increased 74% year-over-year in constant currency to $1.6 million, principally as a result in an increase in a number of UEPS loans provided. Segment operating margin for Q2 2011 improved to 76% from 64% in Q2 2010, mainly due to the higher underlying profitability in our UEPS-based lending activities.

Our final operating segment is Hardware and Software, which includes revenues that occur on an irregular one-off basis that makes it difficult to predict sales and margins from year-to-year. Segment revenue in Q2 2011 was $15 million, representing a 27% year-over-year decline in constant currency. The decrease was due primarily due to lower revenues generated by Net1 UTA and Net1 UETS partially offset by ad hoc hardware sales in our South African business.

The ever changing contributed to the segment core volatility and operating margin from quarter-to-quarter. Operating margin, excluding intangible assets and amortization, for the segment decreased to 14% from 22% in Q2 2010 due to economic pressure at our hardware sales businesses.

Now interest expense for Q2 2011 includes a non-tax-deductible facility fee of approximately $1.7 million. In addition, the interest expense of around $1.3 million relates to the debt raised for the KSNET acquisition and is also non-deductible for tax purposes for the foreseeable future, resulting in an effective tax rate of approximately 40% for the remainder of fiscal 2011.

During Q2 of 2011, we generated cash flow from operations of $5.5 million before secondary taxation on companies of $13.6 million related to dividends paid from South Africa to the United States. We settled the KSNET purchase price of $241 million, utilizing $124 million of our cash reserves and from $116 million of long-term borrowings at a rate of approximately 7%. We incurred capital expenditures of $4 million, mainly at KSNET and for our EasyPay kiosk project.

As of December 31, 2010, we had $71 million of cash and cash 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 priorities for uses of cash remain strategic acquisitions, buybacks and our debt repayments. Our acquisition pipeline remains active and we will continue to look opportunistically at strategic deals that would enable us to accelerate growth and profitability.

Our fully diluted weighted sharecount for Q2 2011 was 45.5 million shares, down from 45.6 million a year ago. We remain comfortable with our fundamental EPS guidance of at least $1.50 on a constant currency basis for fiscal 2011. We continue to expect KSNET to be accretive to fundamental EPS for fiscal 2011, but it is too soon to provide guidance on such level of accretion.

In conclusion, even though our pension and welfare revenue and profitability will be lower during fiscal 2011, we expect to see continued growth in contributions from KSNET, EasyPay and FIRHST for the balance of the year, while we continue to invest in our newer growth initiatives. With that, Dylan, please open the call up to questions.

(Operator Instructions). Tom McCrohan, Janney.

Hi, thanks for taking the question. The comments you had on lower contribution from the pension and welfare business, is that on a year-over-year basis or are you saying current -- based on current run rates this quarter?

Well, the lower contribution from the pension and welfare business obviously is the result of the current sort of 12-month new contract plus the six-month extension that we have just announced. When we compare those to the previous year, obviously the pricing has been reduced quite significantly and what we will see for the remainder of fiscal 2011, as well as the three months to September when the extension period ends, will be more or less the operating margin of the magnitude that we reported in the second quarter.

Tom, this is Dhruv. Just to elaborate on that point. The change in the economics were what we announced in late last year, which takes effect from July 1. And there have been no further changes in those economics since.

Okay, just wanted to clarify that. And then you sound like you, in preliminary discussions you are having with SASSA, you characterize (inaudible) as encouraging? Is there any indication SASSA has shifted their strategy to push more of the payments to the post office? There is a lot of documents I guess that people are looking at last year that included that kind of strategy. Have they talked to you about they are pulling away from that. Now they agree that trying to distribute stuff through the post office doesn't make sense? So if you can just kind of collaborate on your encouraging comments that would be much appreciated.

Hi, it's Serge here. There is no doubt that the post office in South Africa is meant to play a larger role as a government-owned bank or soon to be a bank in order for government to have, for lack of a better word, a outlet through which they can perhaps provide certain services to the majority of South Africans at much lower cost if they can achieve that. That has always been the fundamental drive for the post office.

Now this being said, we must understand that the post office today has not yet obtained a banking license. They still have to file for the banking license. It has been agreed by government they can go ahead and do so, which (inaudible), but we will all know that the time difference between filing and being awarded a banking license can be a substantial amount of time. It can be anything between a year and three years. That is number one.

We also understand the once you become a formal bank, the latest banking regulation, including the Basel I, II, and III, and many other compliance criteria would probably make it, in our view, very difficult for the post office to be able to meet all of these criterias in the short term.

Number three, we have got to look that today the post office does not really have, a part from brick-and-mortar infrastructure, does not have any other ATM point-of-sale infrastructure at all in the country and is therefore reliant on utilizing existing infrastructure, which obviously is owned by the other banks.

So for the post office to actually enter this world and to become, for lack of a better word, through 2000 odd brick-and-mortar post offices a real competitor to the formal banks is probably a very, very tall task.

So all this being said, we firmly believe that, in our discussions, there is absolutely no doubt that everybody talks about what the post office will be able to do one day. But there is also no doubt that nobody is looking at the post office and believes that the post office will be able to play this role in the short term.

So we, on our side, in any case, have always worked closely with the post office. In fact, we use post office infrastructure and post office branches in all of KwaZulu-Natal and we use in excess of 100 -- I think it's 150 or so. And there is absolutely no doubt that our rollout of our own infrastructure includes the post office brick-and-mortar buildings in order to grow an alternative infrastructure to the banks.

We are certainly, on our side, very happy that there is a push for post office simply because they can provide us with the banking license without us having to go and expense or incur the cost of trying to get a banking license ourselves. So we see what we have been doing in the informal world what the post office is trying to do for the informal world to be more to be (inaudible) the positive for us than the negative and we really believe the post office looks at an organization like ourselves to actually fulfill a role which today candidly can only be fulfilled by the banks, which certainly would become more than competitors to them simply because they actually control infrastructure and therefore the post office will not be able to compete from the financial point of view.

So I don't know if that helps you at all, but, right now, we do not see the post office to be a threat to our business short term and we certainly see the post office, in fact, to be probably a friend going forward in terms of expanding what we have done in pension and welfare in the rest of the South African low-income group community.

That is helpful. Thank you for that. And my last question before I jump back in the queue is on VCpay. Can you remind us of the economics to Net1 and as that scales up, including what the pricing scheme is to the end user for the MetroPCS customer? Thanks.

Dhruv, do you want to field that?

Yes, it is a fairly simple pricing structure. For the cost for a consumer, it is a fairly simple feel, a monthly fee of $1.49 a month. Thereafter, they pay nothing for unlimited use of VCC transactions. However, if they were to load and/or spend over $500 or two direct deposits then we usually waive that fee as well. Over and above that, it is the traditional prepaid model where we would earn and retain a net interchange fee.

Thank you.

(Operator Instructions). Dave Koning, Baird.

Hey, guys. I was just wondering, on the International segment, it looked like the margins this quarter were about 14% on a cash basis or adding back amortization now that you have got KSNET in the fold. I would imagine that that goes up as you get a full quarter of KSNET next quarter. But also, over time, I would imagine the leverage just carries that higher. I guess I am wondering where do you think that that margin can ultimately go and then more near term what will be the cost maybe of some of the campaigns around the VCC and MetroPCS, some of the market campaigns around that.

Dave, you are right. The margin obviously should improve over time. We only had two months of KSNET in them. As that scales up to full quarterly numbers, it will improve. So bear in mind that the KSNET margins, the majority it sort of contributed to the segment is more or less going to dictate where these segment margins will go in the medium term.

In our prepared remarks, we gave the operating margin of KSNET itself at around the 17% level. That is operating margin, EBITDA margin close to sort of 28% and clearly what dilutes the margin in this specific segment relates to the costs of specifically the VCpay business activity. Those are in the startup phase, so they obviously generate negative margins at this specific point in time and will cover your separate question around the cost of some of the campaigns.

We also include in the International segment by the way the Iraqi transaction processing activities and again, those run at a very high margin. And will hopefully continue to do so over the next -- for the remainder of the fiscal year and going forward, but in relation to the size of KSNET, the impact of those much higher margins are obviously not as easily determinable.

On the VCpay side, the current monthly sort of cost of that business we can really sort of break into two components. There is clearly the fixed cost component, which is the cost of us running the activity in the US, our staff, their office in Dallas. We don't expect those costs to increase substantially over the next few quarters. Our core team is in place and we believe that we are adequately staffed at this point in time to focus on specifically the MetroPCS rollout.

In terms of the campaign costs, I think it is important to note that a lot of the costs associated with some of the initial campaigns are carried by MetroPCS themselves. So if we look at specifically the SMS campaign that Metro sends out, the pamphlets that they distribute with every single phone and every handset that is sold, the (inaudible) that get put out in every single Metro PCS office, those are all costs that are carried internally by the MetroPCS marketing team.

From our point of view, we would like to focus more specifically going forward around campaigns that will encourage people to load more value onto their devices and to do so more frequently and obviously to spend as much money as they load onto these devices.

Like Dhruv mentioned, some of the costs will be waived, some of our revenues, sorry, will be waived in the process as people load more value to their handsets, but that should be offset by the interchange fee that we earn.

So in summary, I think looking forward at least for the next couple of quarters to the end of fiscal 2011, and probably for the next 12 months of fiscal 2012 as the Android rollout scales up, we don't see a significant cost burden on the group in terms of our VCC or VCpay marketing activities and we firmly believe that whatever money we decide to invest in the marketing of this service should be more than offset in the not-too-distant future by the increased adoption rate and from the revenues generated by such campaigns. So in all, it shouldn't be a very dilutive activity for us going forward.

Okay, great. And then the second thing, the UTA business, it was in the Q that you bought the last 20% of it at about I think a 97% or so discount to what you bought the first 80%. So clearly that hasn't met your expectations. I am just wondering what does it take there really to get that back on track. I mean is it just the economy or what else -- I guess what went wrong and what can you do to bring that one back on track, get it all profitable again?

Let me just quickly discuss the purchase consideration that in no way is a reflection in our view of the value of that business. It was a very opportunistic opportunity that we had with the other shareholder being Sparebank in a position where they believed that the investment was no longer a core investment for them and as they are sort of balancing their portfolio of investments, we decided to approach the bank after the initial discussions they had with us and with a view to obtain this 19.9% interest.

The 19.9% interest had no real special covenants or rights attached to it, which obviously assists one quite a lot in the negotiation process. And when it came to determining the value, we agreed that using the tangible asset value of the business was probably the easiest and the best way for us to conclude a rapid transaction. And so we calculated 20% of the tangible NAV and that is what the price was and we managed to execute the transaction very quickly.

What it would take to really turn the business around is obviously, in our view, reliant on a number of initiatives that the team in Vienna are working on. On the one hand, they still have the typical traditional hardware and software sales activities and they have some major customers that remain mainly in Uzbekistan that they would have obviously continue to service as this system has become a national payment system in that specific country.

But from the remarks that we have sort of given over the last three years since we acquired this business, we still believe that the turnaround fortunes of Net1 UTA is largely dependent on its ability to convert from being a hardware and software selling business to being a transaction processor or a business that generates revenue from recurring transaction-based activities.

And I think from that point of view, we have made good progress with the team over the last year or so. They have, in conjunction with ourselves, prepared a pretty extensive strategic document that really focuses on them obtaining and focusing on customers, which provide us with the recurring transaction-based revenues that we think will really turn around the fortunes of this specific business.

We have also got a new suite of products in the form of what we call [fusions], which is really an enhanced form of our UEPS with the functionality that we would need in an EMV environment and there has been a fair amount of interest from a number of customers across the former CIS republics and in Russia for this specific product to be done as a partnership with them or as software as a service type concept.

And so in my view, the turnaround strategy for this business will be hugely reliant on our ability to implement a model that is of a recurring income generating nature rather than focusing on the sales of the hardware and software licenses, which it has been in the past.

And Dave, this is Dhruv. Just to add to Herman's point, the pipeline of opportunities they are following is obviously fairly substantial and the key for the financial performance is obviously getting one or more of those over the finish line. And I think the moment you start to see transaction-based revenue come in through Net 1 Austria, you'll start to see some kind of improvements in the profitability and financial performance as well.

Got you. Great, thank you.

Gentlemen, as there are no further questions, I will now bring this conference to a close. On behalf of Net1, that concludes this conference. Thank you for joining us. You may now disconnect your lines.