Lesaka Technologies Inc (LSAK) 2011 Q3 法說會逐字稿

Good day and welcome to the Net1 third-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 third-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 discuss our results in South African rand, which is a 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 underlying trends of our business. As you know, the Company's results can be significantly affected by the currency fluctuations between the dollar and the rand.

So with that, let me turn it over Serge.

Thank you very much, Dhruv. Good morning, good afternoon, good evening to all of our shareholders around the world. Today, I would like to begin with an update of the key trends for the business before I'll hand over to Herman, who will discuss our financial performance in more detail.

To summarize our third-quarter 2011 results, we reported revenue of $93 million, which is a year-over-year increase of 28% in US dollars and 19% in constant currency. Fundamental EPS for quarter three 2011 was $0.38, which is down 26% in dollars and 31% in constant currency.

This quarter continued to be adversely impacted by a new contract with SASSA, which pressured both revenue and profitability. Our third quarter is the first one that includes KSNET's result for the full quarter.

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

As of March 31, 2011, we had $89 million in cash on the balance sheet, bringing our net debt position to $34 million. Operating cash flow during the quarter was $28 million, and $53 million year to date.

In keeping with our communications strategy outlined on our previous earnings call, I will focus my discussion on our three groups of businesses, namely our established businesses, our growth businesses, and lastly, our startup businesses.

First, our core established businesses, which include CPS, KSNET and EasyPay, together in quarter three 2011 accounted for approximately 80% of our revenue, as well as the majority of our profits today. These larger and more mature businesses either are or have the potential to generate at least double-digit growth consistently over time.

The second subgroup we classify is growth businesses, which are smaller but, in our view, have the potential to grow at a rate materially faster than our established businesses over time. This group, which is also strategic in nature, includes Net1 UEPS, MediKredit, FIHRST and Net1 UTA, which collectively account for 12% of our revenue.

The [following] subgroup is classified as startup businesses and currently includes Net1 Virtual Card. Net1 management believes this category has the potential to grow into material drivers of Company growth over time.

This being said, let me begin by discussing the current stages 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. On April 15, 2011, SASSA issued its invitation to bid for long-term tender for the payment of social grants in the country. Bidders are required to respond by May 27.

Now, today, we have received a letter from SASSA informing us that this particular date was now extended to June 10. And as previously discussed by SASSA in January, they expect to complete this evaluation before the end of September.

Under SASSA's directive, bidders are not permitted to discuss any topics related to the tender without their prior approval, and therefore, we are unable to provide further details on the tender at this time.

The personal and structural changes we began to see starting in late 2010 at both SASSA and the Ministry of Social Development have continued in 2011. Effective May 1, 2011, a new CEO was appointed at SASSA, who brings with her over 25 years of experience at the Ministry of Social Development, as well as at the provincial government level. Additionally, we are awaiting the appointment of a new CFO, as the current CFO was suspended until further investigation.

I am of the view that the appointment of the new Minister, new CEO, and the imminent appointment of the new CFO bodes well for SASSA and therefore for our Company over time, as a stable SASSA should bring them greater efficiency and faster decision-making.

The number of beneficiaries paid in our far provinces has remained largely unchanged, consistent since June 30, 2010. Finally, as we have reiterated previously, our competitive advantages over any current or potential competition for the disbursement of social grants remains our technology, infrastructure and track record, particularly in rural areas, which account for over 80% of our beneficiary base. Additionally, we have migrated approximately 44% of our beneficiaries to an electronic model, thereby reducing the amount of cash in the system.

Moving on to KSNET, one of the leading providers of card processing in Korea, it remains 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 have actively been working on identifying and evaluating potential revenue synergies, and some of the growth initiatives preliminarily identified will be funded from the cash generated locally in Korea. We will provide additional details as we get further into this process.

In the third quarter 2011, KSNET financial and operating performance has been consistent with management's expectations. In quarter three 2011, industry growth and therefore KSNET transaction growth was noticeably lower than its historical rate as a result of severe winter weather conditions, as well as a conscious management decision to replace a couple of large but low-margin retailers with a number of smaller and midsize retailers, who helped improve profitability, driving year-over-year profit growth in excess of 20% during the quarter.

Focusing on EasyPay, it remains well positioned to generate sustained and potentially accelerating growth over the next few years. During the third quarter 2011, EasyPay signed an additional 20 [bid issues], and 1000-plus retailers and gas station locations signed over the past two quarters will start to be rolled out in fiscal 2012. We continue to accelerate the penetration of value-added services, allowing us to move further up the value chain and in turn increase average revenue per transaction.

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 portfolio of available products, and create revenue synergies with our MediKredit and FIHRST offerings domestically.

Let me now spend a few minutes on the key trends in our growth businesses, starting with NUETS, our subsidiary focused on Africa and the Middle East. First, in Iraq, our partners have now enrolled over 2 million cardholders, and more than 5000 point-of-sale terminals have been sold and delivered. Last month, we exceeded 1 million payments for the first time, demonstrating that under the current Iraqi government program the growth trend is increasing over time.

While expecting organic growth from our existing mandate to continue, NUETS is actively pursuing a number of additional initiatives in the country that could add further scale and make our technology even more ubiquitous. In Ghana, issued cards have now reached 600,000, and NUETS is preparing to introduce a number of additional services that would create a recurring transaction-based revenue stream for the Company.

Namibia, Botswana and Malawi continue to grow in relation to the overall size and to generate small but sustainable revenue streams. Elsewhere on the continent, NUETS is pursuing a number of tenders in a number of countries, and we are confident that they will be successful in at least a few of those endeavors.

For MediKredit in South Africa, in quarter three 2011, our revenue declined year over year as the customer migration announced last year will anniversary only in April 2011. In the meantime, we continue to pursue and process claims in an increased number of public hospitals across numerous provinces, giving us potentially the broadest base of services across the issued and unissued populations.

Our healthcare claims processing subsidiary in the US has also increased its marketing efforts as more and more industry participants are seeking for a solution that helps them address some of the requirements mandated by the Obama administration.

FIHRST continued to expand its base of customers and has added a further 15,000 to 20,000 employees during the quarter, as well as commencement of initiatives to capture synergies with EasyPay. I believe that FIHRST will play a significant role in growing our customer base that uses our new EasyPay Web and Web applications.

For Net1 UTA, one of their large customers notified the Company of its intention to transition away from the UEPS platform, which [while it's frustrating] is not surprising, given our intentions to replace hardware and software revenue with transaction-based revenue streams, a model that may not always be acceptable to all customers.

I will let Herman discuss the impairment charge in more detail, but I do want to highlight a few items as it relates to our strategy towards Net1 UTA. First, we have taken actions that should return this business unit, at the minimum, to a breakeven level in the relatively near term.

Second, we continue to pursue new transaction-related business development activities both across our traditional UEPS system as well as our Virtual Card.

Lastly, although we are not pleased with the time or effort it has taken to transition the business model, Net1 UTA still has enough opportunities in its pipeline that suggest it can still be classified as one of our growth businesses over time.

Finally, turning to EasyPay in the US, our program with Metro PCS continues to gain traction. Within the last couple of months itself, we have equipped more than 500,000 handsets, bringing the total number of EasyPay-enabled handsets to over 1 million. Only within the past month have we began adding marketing material with select new Android handsets, which has had a positive impact on new client registrations. Although we have several thousand registered users today, there is a lot of room to drive penetration rates much, much higher.

Meanwhile, we continue to enhance our system by adding choice and convenience for users. This month, we start an agreement with Green Dot where their MoneyPaks can be used to fund EasyPay accounts and brings our overall cash loading network to over 100,000 locations.

At the same time, we actively pursue new customers and strategic partnerships to drive greater awareness and, of course, [care].

To conclude, I believe that the new SASSA tender will, once finalized, provide greater visibility and confidence to our existing and new shareholders and, in turn, reflect a truer valuation of our Company. I believe that our management team, our technology and our diversification strategy in terms of currency, country and market segmentation will allow the Company to regain its initial appeal with a much lower risk profile and thus deliver improved returns for all of its stakeholders.

With that, let me turn over to Herman, that will review the financials. Herman, over to you.

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

For Q3 of 2011, our average rand/dollar exchange rate was ZAR6.99 compared to ZAR7.53 a year ago and positively impacted our US dollar-based results by approximately 7%. The comparability of the financial results for the third quarter of fiscal 2011 is complex, as the quarter under review includes an impairment loss, the KSNET trading results and the change in the SASSA economics. 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 Q3 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 I excluded from my discussion below. These one-off items include a net impairment loss of $31 million related to Net1 UTA's acquired intangible assets and transaction-related expenses of $0.5 million.

Intangible asset amortization increased year over year due to the inclusion of KSNET and FIHRST 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 comparison. We typically exclude the effects of irregular tax changes, amortization of intangibles, stock compensation charges and unusual nonoperating or noncash flow items when we calculate this measure.

On a consolidated basis, for the third quarter of 2011, we reported revenue of $93 million, an increase of 19% in constant currency and 28% in US dollars. Fundamental earnings per share of $0.38 in the third quarter of 2011 declined 31% in constant currency and 26% 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 29% during the third quarter, down from 42% a year ago, primarily due to the lower economics in our South African pension and welfare business and the inclusion of KSNET, which has a lower operating margin than our legacy South African businesses.

We have created a new segment, mainly as a result of the KSNET acquisition. This segment, international transaction-based activities, includes KSNET, Virtual Card, and operations related to the newest transactions processing initiative in Iraq.

Before I discuss our segments, I want to spend a few minutes to discuss the impairment loss. During Q3 of 2011, one of Net1 UTA's largest customers advised us of its intention to transition away from the direct platform, which will negatively impact our revenue, net income and cash flow in the medium term. As a consequence of this development, as well as deteriorating trading conditions and uncertainty surrounding the timing and quantum of future net cash inflows, we reviewed customer relationships acquired as part of the Net1 UTA acquisition for impairment.

As a result of this review, we recognized an impairment loss of approximately $41.8 million related to the entire carrying value of customer relationships acquired in the Net1 UTA acquisition in August 2008. In addition, we wrote back the deferred tax liability of $10.4 million associated with this intangible asset.

Within the segments, South African transaction-based activities posted revenue of $47 million during Q3 of 2011, 14% lower in local currency and 7% lower in dollars as lower revenue from SASSA was largely offset by the inclusion of revenues from FIHRST and the increased contribution from EasyPay.

In Q3 2011, our acquisitions of MediKredit and FIHRST together contributed approximately 8% of total segment revenue. In constant currency, segment operating income excluding amortization decreased by 30% from Q3 2011, while operating margin declined 14 percentage points to 42%, due to the lower profit margins in pension and welfare and MediKredit and the inclusion of FIHRST, which has a lower margin than our traditional processing businesses.

Moving to our operating metrics, during Q3 of 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 third quarter, we processed a total of ZAR2.9 billion through our network on a completed pay cycle basis, representing a 1% year-over-year decline. The productivity of our 4835 installed terminals declined to 981 transactions processed per POS device during their completed pay cycle from 1003 transactions during Q3 2010, due to the addition of 135 more POS terminals over the past year, in line with the increased demand for merchants to offer this important service to their customers.

In Q3 of 2011, EasyPay processed 171 million transactions with an approximate value of ZAR40 billion, an increase of 6% compared to 162 million transactions worth ZAR35 billion processed a year ago. The increase is primarily due to an increase in core transactions and value-added transactions in the quarter. Our other South African processing businesses posted 7.8 million transactions worth ZAR18 billion.

Our international transaction-based activities posted revenue of $25 million during Q3 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. The 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.

Given management's efforts to focus on smaller but higher-margin retailers, KSNET was able to expand its EBITDA margin in Q3 2011, reaching 29% in this quarter. These margins may fluctuate over time as KSNET has to invest in POS terminals and review agent commissions continuously to remain competitive and retain and grow its market share.

Our small card account segment posted revenue of $8 million in Q3 of 2011, a 3% year-over-year decline in constant currency. The total number of active small card accounts was 3.5 million, a decrease of 2% from last year, but relatively flat over the last three quarters. Operating margin for the segment remained consistent at 45%.

For our financial services segment, revenue in Q3 2011 increased 75% year over year in constant currency to $2.2 million, principally as a result of an increase in the number of UEPS loans provided. Segment operating margin for Q3 2011 improved to 78% from 72% in Q3 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, which makes it difficult to predict sales and margins from year to year.

Segment revenue in Q3 2011 was $10 million, representing a 22% year-over-year decline in constant currency. The decrease was due primarily to lower revenues generated by [new ways] and other South African-based hardware/software-related technology sales business units, partially offset by an increase in sales at Net1 UTA.

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 negative 3% from 5% in Q3 2011, due to economic pressure at our hardware sales businesses.

Our interest expense for Q3 2011 includes amortization related to our non-tax-deductible facility fee of approximately $100,000. In addition, the interest expense of around $2 million relates to the debt raised for the KSNET acquisition and is currently nondeductible for Group tax purposes.

As of March 31, 2011, we had $89 million of cash and equivalents on our balance sheet. During Q3 of 2011, we generated cash flow from operations of $29 million before [second written taxation] on companies of $1.1 million related to dividends paid from South Africa to the United States.

In January 2011, we made our first interest payment of approximately $2 million related to our (technical difficulty) acquisition [loan]. We incurred capital expenditures of $5 million, mainly at KSNET and for our EasyPay kiosk project. We also settled KSNET's existing working capital facility of approximately $7.1 million, and we believe that KSNET currently have sufficient working capital to fund its initiatives and meet its obligations.

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 use of this cash remain strategic acquisitions, buybacks and debt repayments. 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 diluted weighted share count for Q3 2011 was 45.6 million shares, constant with a year ago. We remain comfortable with our fundamental EPS guidance of at least $1.50 on a constant currency basis in 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 FIHRST for the balance of the year, while we continue to invest in our newer growth initiatives at MediKredit and Virtual Card and Net1 UTA.

Before we open up for questions, please remember that we are restricted from making any comments related to the SASSA tender specifically. With that, we are opening the call for Q&A.

(Operator instructions). John Zaro, Bourgeon Capital.

So can we assume from this write-off that you've taken on the UTA that the acquisition, as a general rule, is sort of behind you and that the problems that you've had with it -- I'm assuming it's Sberbank that's the biggest -- is the customer.

We acquired this business three years ago, four years ago now. We have quite a number of customers in the Net1 UTA environment. And obviously, the evaluation of the customer relationships was done based on the relationships that were in place at the time of the acquisition.

And at the time, we had a couple of key relationships; Sberbank, of course, is one of those. Sberbank, although a smaller customer, remains a user of the DUET platform and still contributes in a minor way to the revenues of Net1 UTA.

We also had a significant amount of business in the Republic of Uzberkistan, where the DUET platform was really used as a national payment platform. And in Uzberkistan, we were informed recently that there is a drive towards the payment system being changed into a system that is [P&V] compliant, and as such, they made a decision to move in that direction.

We have no clear indication from our customer at this point in time how long this transition will take. And it could be several years. But, obviously, in the interest of being prudent and taking a holistic view of this, we decided to [impair] the customer relationships, all of them, as they existed at the time of acquisition in 2008.

Okay. And my second question has to do with -- and I've talked to you about this before, Serge, over the last two years. I mean, I hate to say this, but as the stock sinks ever lower, your credibility just gets worse and worse.

So, I guess, what are you guys trying to do to somehow address the fact that people think you actually have all this under control? You're spinning out of control, and it's not the markets; it's you guys. You reaffirm what you are going to make in your earnings, but no one cares, because they don't believe that you are going to actually do it.

Yes. I think -- well, thanks very much, first of all, for bringing this up. I think we are, just the same as you, we're very much aware of this. And we keep on very much scratching our heads, to some extent, about how do we build back the confidence in the Company, simply because, as you are quite correctly saying, what Herman has mentioned about the $1.50, we will definitely make.

In the past, you probably are aware of the fact that -- I don't think that over the last five years or six years, we've actually missed one number on a quarterly basis. So we certainly believe that we will continue to meet the numbers that we are actually indicating to the shareholders. That's number one.

We are very much aware, however, that right now it doesn't seem to appear that it really matters what it is that we say or don't say in terms of motivating or interesting any new shareholder to come into the stock. And, candidly, a lot of the older shareholders -- and probably, I can understand their point of view -- have lost a lot of interest in the Company.

Now, we very much, rightly or wrongly, put this down to the unfortunate events that happened with our SASSA contract, which I'm sure that all of you are aware has very little to do with us specifically, but unfortunately is something that is very much in the hands of the South African government.

Now, we have been working very, very hard in trying to find or trying to facilitate some form of resolution in terms of SASSA, because we firmly believe that without that firm resolution, we will not be able to go forward in a way whereby our credibility will once again be what it used to be. In other words, it would be, I think, very onerous on our shareholders to simply ignore SASSA or discount SASSA, which is what they are currently doing at the moment, to zero.

Once we know what the outcome of SASSA is going to be or is, being it that we are still in the game in a big way, in a bigger way and a [looser] way, we will therefore know that for a substantial amount of time that will be what it will be. And then shareholders will be able to actually put their heads around what the Company is capable of doing, knowing that SASSA is now something that exists or doesn't exist or partially exists for a lengthy period of time.

We firmly believe that without that decision or that final decision to be made, that we are not going to be in a position to use the other 20% or 30% of the businesses, which are working very well and which are growing very well and that we are very, very happy with. But that is not going to be good enough to reconstruct the credibility on the investors.

And my greatest concern -- and we have spoken to a number of investors -- my greatest concern is that without SASSA or without some firm finality on SASSA, we can pretty much say whatever we want, because the only thing people are wanting to hear about is SASSA and what will happen as an outcome to SASSA.

So the only encouraging thing that I can say today is that we firmly believe that the change in terms of SASSA's Minister of Welfare, in terms of the SASSA CEO, in terms of the fact that the CFO is no longer there and will be replaced shortly by somebody new, and the fact that the bid or an RFP, for lack of a better word, was issued with some form of commitment by SASSA, that they intend to finalize it by, in fact, the end of September -- this, in my view, becomes reasonably exciting, simply because, at the end of the day, that means that we should be able to get finality before the end of the first quarter of next year, the next financial year.

And that, I think, will put us back on to a track whereby we can start again talking to investors not only about SASSA, but hopefully we will be able to simply say, these are the facts about SASSA, and let's forget about that, and let's start focusing on what we have done in the Company in terms of diversification; in terms of EasyPay, which is a great business; in terms of KSNET, which is a great business; in terms of what we are doing in the penetration in Africa, which are great businesses; in terms of our VCC, which is growing exponentially; and a number of other smaller businesses, including MediKredit, because we believe that those businesses will penetrate the American market.

Now, we can talk about all of these, which are very small right now, in huge amounts of time and effort. It's not going to make any impact until SASSA has been resolved.

So I think, for the people that still believe in the model or the business plan or what we are doing, they only have to be, unfortunately, patient for another three or four months. And at that point in time, I think it will either be a decision to say, guys, that's it, we are out of here; or this is the time to actually already believe that the Company is back on track and therefore should get back to what it used to be two or three years back or four years back from now.

That's the way we are seeing it. And we are not too sure what else we can do in the meantime. If anybody has got any better ideas of what we should do or what we could do, of course, I'm always very, very happy to listen to that.

Well, as long as you guys operationally run the other businesses well and they get better, but that has been some of the problems as well, as you know. The acquisitions have not worked exactly as you thought.

True. And once again, I think you are referring, obviously, to the acquisition of BGS or what we call Net1 UTA. And you are perfectly correct. But if you'll remember, at the time we made it, we made a statement when we bought the company that the company was really a company that, although was in IT, were really and already at a model whereby they were sending hardware terminals, cards, and basically what they called licenses, but it was very much in the hardware sales segment.

We really did not believe that that is something that was sustainable, because that company would have to keep on starting from zero every single year. We wanted to change and move that model to a recurring revenue model.

Now, unfortunately or fortunately, and I believe long term it's the right decision, we have to change the model. When you change the model, you are going to customers and you are saying, Mr. Customer, I don't care anymore if you want to buy terminals from me and I have to make $50 on every bloody terminal. I'm not interested. I want a recurring revenue for the IP that I'm delivering. And if you are not happy with that, then look for another technology.

Now, I know it sounds perhaps a little arrogant. It's a question of saying, at the end of the day, you've got to sometimes to break a few eggs to make an omelet. So we still believe that our decision to change the model might have lost us some money. And this is what [Herman] correctly said; maybe we should simply discount or eliminate any sort of customer value, simply because the customer base that is going to go for the new model is not likely to be the same customer base that used to simply buy terminals.

That's a decision we made. It might prove to be the wrong decision. I don't; I believe it's the right decision, except that we might be taking a few punches right now in order to build the business that will be, long term, far more sustainable.

So that's what we do in KSNET. I don't believe right now anybody can judge if that's a bad or a good acquisition. We believe right now it's a steady, very good, very steady acquisition that is performing according to plan. So we are very happy with that. But it's also giving us a very nice entry in an area of the world that we could never, ever get into before. And we are already developing some very good synergies in that particular area. So we are very, very excited about that.

When we look at EasyPay in South Africa, I get an offer for people to buy EasyPay at least once a month, and certainly, to buy EasyPay for $200 million, a shot. So EasyPay is a growing business, very valuable business and basically a very, very well-run business.

MediKredit, when we bought it, we knew -- we paid $10 million for the business, not because we felt that the business was so damn profitable, because we like the IP that mixed with ours we believe could solve some of the problems that are South African problems, as well as some of the problems, candidly, that exist in the United States.

We have made great strides in the US. And I think you will see something very, very extraordinary, to prove to you that in fact what I did say and what I did want to do is in fact going to happen. So every other business that we have been into or that we have grown or optimized has worked very, very well, in my view, and continue to work well.

We needed a little bit more time to show it. Unfortunately, we still have that big SASSA overhang. And once that's gone, I think that the Company will go back to the credibility that it actually deserves or, certainly, that the people deserve.

Thank you very, very much. And I think you articulated where you want to go terrifically.

Dave Koning, Baird.

I guess I totally understand on the SASSA side that it's obviously early to make comments into next year, given the RFP and things like that. But would you say going into fiscal '12 that on all the other businesses combined that you would expect more profit out of the non-SASSA business in '12 than you did in '11? So, for example, overall, if you had KSNET, I would imagine that would be more accretive in '12 than '11. Hardware sounds like should be less negative at least than it was in '11. I would imagine EasyPay would continue to get more profitable. I just want to make sure that we can count on the non-SASSA business at least growing in profitability next year.

I think your statement is correct. Obviously, our traditional South African businesses, as well as our international processing businesses, specifically in the form of KSNET, now are the type of businesses where we would expect a solid amount of growth and for the growth rates to remain in line with what it has been over the last few years.

Of course, we have the amortization of all the intangible assets that go with some of these acquisitions, and we should at least exclude those non-cash-flow items. Every year, we try to look at things rather simplistically, and we always focus on cash conversion ratios and on the cash flow growth rates of these businesses.

And certainly, when we look the core assets that we have outside of the sort of SASSA scenario, those are all growth businesses that we have invested in, and those are all businesses that we expect to grow in the short and medium term going forward.

We've got some of the smaller kind of support in our hardware and software businesses, and you said those are difficult to predict. I think, to the extent that some of these things are symbiotic, a good example, for example, would be what we do in Iraq. In Iraq, we have a business that is intensely focused on production. But as a result, there is a certain amount of hardware and software sales that go with the growing of that business.

And unfortunately, those things are lumpy. The customers that we have around the world and specifically in Iraq and in Ghana the kind of customers that would buy or stock up on cards, on terminals and whatever else they require from a hardware and software point of view, on a semi-annual or annual basis.

And obviously, whenever that happens, it could be one fiscal year, it could just fall outside of one and into another; that clearly has some impact on our difficulty to predict the growth in that business. But as far as the core processing businesses are concerned, those are all growth businesses. And we expect all of them to grow in the next year and in the next years going forward.

Those should be the dominant activities that drive the Group's growth, the hardware and software side of it, as Serge explained, and specifically now that Net1 UTA is being refocused, should have a lesser and lesser impact on the reduction, as it were, in the growth rate overall over time.

But perhaps just to add on to this, which I think is important, and I think we've got to be very clear on this, for many, many years we've always reiterated that we are not a business that is in the business of selling hardware. That's not what we do. We do and we sell hardware when that hardware or those hardware sales are somehow complementary or supplementary to us generating transaction revenue. So if we are selling terminals, it is because those terminals are being sold to a merchant in South Africa which happens to be linked to EasyPay.

We do not go and seek to sell terminals to other merchants or to banks, for whatever reason, who are not going to then generate transaction volume or value-added services or switching to us. We simply don't do that. We are not a hardware supplier per se. We supply hardware if people intend to use that hardware in conjunction with our own software or our own systems. And that is something you've got to understand.

So if I project things long term, the hardware sales will simply be part of completely and utterly complementary to transaction revenue. Other words, that hardware sale will simply not exist.

Okay. No, that's great. And then just two quick ones, I guess. One is EasyPay decelerated, I think, to 5% transaction growth. If -- maybe why that is and how that reaccelerates. And then I guess the other is that, with the stock pulling back here, would you want to buy back more stock, given all the opportunities that you laid out?

EasyPay obviously is a bit of a seasonal business. Last year, we had the Easter period during Q3. It was very early last year. This year, the Easter period obviously fell outside of Q3, in Q4. So I think that certainly has some impact on the quarterly comparability of EasyPay's results. And we obviously expect that to bounce back in Q4.

As far as the share buyback is concerned, we've got the general authority program in place. We do have our normal considerations in terms of the uses of the cash spread between whether we have some acquisition opportunities that are on the table, whether there are some debt repayments that would make sense for us to do in the Korean environment, depending on what the exchange rates do between the rand, the dollar and the Korean won. But we are obviously actively looking at the share buyback scenario at these current price levels.

And again, to add on to this, which you will understand as well, you also know that we have been saying for many years that we had to eat a fairly, fairly strong war chest, due to the SASSA tender, because nobody knew what was the South African government going to ask for within SASSA. Were they going to ask for prefunding of provinces? Was the prefunding going to be for a week or two weeks or a month? Were we going to tender for the whole country or a province?

If we had to, for example, have to somehow fund an entire month for the whole of South Africa, we'd have to fund ZAR8.5 billion or in excess of $1 billion a month, would be the money. Now that, of course, at least, the tender is out, Herman now is going to be far, far more capable of being able to predict what his cash flow should be or what his liquidity is supposed to be able to do in order to plan and therefore to start looking at buying back stock at a buck. Candidly, if we had enough money on our balance sheet, I can assure you that by now we would probably have bought the whole damn lot.

Great. Thank you.

Tom McCrohan, Janney Capital Markets.

I was under the impression the revenue and cash flow contribution from BGS or the former BGS was relatively low, based on comments you had given us before. And I'm assuming it is still low. But, Herman, you mentioned that with the loss of clients, it's going to adversely impact revenue and cash flow going forward. So I was wondering if you can just give us an idea of what the contribution is today in revenue and earnings from the former BGS business.

Sure. Let me just get you the relevant information. If you look in the Quarterly Report, Table 12, we actually provide in rands, though, obviously, in the segment results under the hardware and software sales component, we strip out the Net1 UTA contributions. And if you look at what we put into Table 12, you will see the Net1 UTA contribution in terms of the current quarter, third quarter, was ZAR18 million on a revenue basis.

On an operating profit sort of level, or loss level, excluding the amortization of intangibles, it was just over ZAR1 million, so probably about $200,000 loss. And obviously, including the amortization of the intangibles and the impairment loss, that number becomes a lot bigger, really equal to the $41 million that we impaired. But, so, on a revenue basis for the quarter was probably about $2.5 million and an almost breakeven result.

That was my impression. So even with the loss of this client, it shouldn't really move the needle that significantly going forward?

No.

No, I think -- and again, this isn't the kind of client that moves away from one day to the next. There is a phase-out period, and that period can take several years. But for the Company as a whole, it doesn't really make a significant impact on the Group results as such.

But, again, I think the thing that we should focus on as far as Net1 UTA is concerned is, looking forward, what kind of transaction-based revenues and new business activities can be generated focusing on the geographic areas that the team in Vienna is focused on right now.

I think the trick is, with Net1 UTA, and that's a decision we had to make at some stage, that you can't be half-pregnant. You can't, on the one side, use your entire resource base in order to maintain or to keep let's call it what I will call hardware business and, at the same time, say you want to use the resources this time in order to move to a more long-term sustainable transaction-based revenue.

There has to come a time where you've got to be able to say, what other business is left? Are we going to try to take it, or are we going to try to continue to make as much as we can? But we're going to be spending very little time in actually making sure that we keep that particular business, because it's not business that we necessarily want going forward.

We need to use and to convert the resources and the activities and energy of the Company to move a lot quicker to a transaction-based revenue. Otherwise, we will lose the one over time, but we will not have constructed the other. And that's the decision we made. And this is why Herman has decided, therefore, that we should write off anything attributed to existing customers, simply because we do not know if those customers are going to be the ones we want going forward.

And in connection with SASSA, and I appreciate you have limitations on what you could say, but I'm going to try asking the question anyway. The incoming CEO -- was it contingent on her hiring that she puts this contract to bed by the end of September? You already had a delay, as you announced today, from May 27 to June 10 -- not a significant delay. There was a briefing that was scheduled for today. And according to the SASSA website, that was delayed --

Correct.

-- with no announced date.

Correct.

And now you have an incoming management team. So I'm just wondering, is the September date now going to start getting pushed out again? Because there doesn't seem to be any pressure on SASSA to get this done. And I'm wondering if the incoming CEO, that a condition of her hiring was that she gets this done, or maybe not. So I was wondering if you could just comment on (multiple speakers)

Unfortunately, I think whatever I'm going to tell you, like the previous investor said, my credibility might not be worth too much on this particular issue. But we have to say it the way that we see it.

We can only believe that the changes that were made were made for a specific reason. Otherwise, they wouldn't have made the changes of the Minister, of the CEO or the CFO. We know SASSA was running into a number of problems; we disclosed that before. We know they were running into financial issues. They were overspending. People didn't know exactly what direction they were going into.

I think this new team's intention is definitely to actually say we have to do something. We cannot have a system that is losing billions of rands of the fiscus every year, and we continue to lose billions of rands because we are not repaid to go through a process and make a decision.

So we are -- and I suppose that's a double-edged sword. But after so many years of waiting for this to come out, I can assure you that it's almost a huge relief for me to know and to believe that this thing is going to reach finality in the short term. And we really hope that the short term will be the end of September.

To tell you if we will still be in this tender or not by the end of September is another story. So, again, when I go to bed at night, I'm saying to myself, well, considering that we have all of the rural areas, that we have the proven technology, the proven track record and, candidly, that we do not believe that anybody can do it at the price that we can do it at, I'm saying to myself, any result of a tender cannot be bad for us. It's not possible. Sure, maybe somebody will say, but your margins are going to be under pressure, and maybe you are not going to make as much money as you made before.

Right now, that's not my concern. Right now, I want finality. I want to know what will happen over the next three to five years. And I want my investors to know we can build the rest of our businesses and continue to develop these businesses during that period of time without the investors asking me the same question over and over again, namely, what is happening with SASSA?

Once that is gone, I think you are going to see a complete transformation, not only in our investors', to be quite honest, profile, but also in the way that the Company will be able to behave and be able to communicate what it is that we are doing, because at the moment, candidly, whatever we say about anything else which is not SASSA, I don't think anybody really cares right now.

We have time for one more question.

Ethan Meyers, Westfield Capital.

Serge, I wanted to go back to this concept of rebuilding credibility with the investment community and what can you guys do. And we've looked at the stock here, and I would argue that your commentary earlier on was right on, when the stock was materially higher. So at $12, $13, whatever you want to call it, clearly the market --

It's 9%.

-- is concerned about -- well, no; I'm looking back historically, currently. And obviously, the market was applying some value for SASSA. What I think is missing from here is we've all run our own sum-of-the-parts analysis on your Company. We all believe that it's -- even with SASSA being a complete zero, we believe your business is worth more than where it's currently trading.

So my argument to you would be, the reason the stock is doing this is because you have sort of been abandoned by the investment community in the sense that you are not providing enough attention for people. You've got a big US investor base that hasn't seen you in years. And, frankly, people have been told either in private conversations or in public conversations that you guys were going to make an effort to come to the States and see your investment community to talk about your businesses. And that has not happened for years.

And I appreciate the challenges of having the SASSA contract and the RFP in front of you. But when are you coming to the US to meet with investors? What is that going to happen?

Well, like we said at the last quarter, we are planning this at the moment. And once again, I think perhaps a lot of our investors may or may not realize what amount of time and effort one has to put into a tender like the SASSA tender. This isn't something that we can lose. This isn't something that we can afford to lose. This isn't something that we want to lose, and this isn't something that we will lose.

So at the end of the day, whatever I have to do to ensure that we will continue to play a major role in SASSA, I will do it first and foremost, before anything else. That is point number one.

Point number two is that I am looking forward to, in fact, talking to our existing investors, the ones that have believed in the Company for a long time, specifically -- and, candidly, any new investor. But I would like to be able to give them some finality on SASSA so we can spend 20 minutes on that and then talk about the other great opportunities that this Company is doing and is capable of doing.

I do not want those opportunities to be discounted or belittled simply because the guy sitting in front of me, the back of his head, he's started saying, [na-na-na-na-na, and so-and-so], well, what about SASSA? This is the [catch we need to].

Now, all of us understand exactly what you are saying. I am still very much convinced that right now, any discussions we will have about the other businesses -- and by the way, it's very easy for anybody to work out what the Company is worth. We paid $250 million for KSNET. EasyPay is probably, today on the market, today you could probably sell it for $220 million, $250 million as well. That's already $500 million. So how can the Company be worth $350 million? Any idiot can work that one out.

So there's absolutely no doubt that even if you discounted SASSA to nothing, we know that the share is undervalued by a formidable amount. There's absolutely no doubt about that. My point is I don't want the share to go from $8 to $10 or from $8 to $11 because of the fact that the other businesses, apart from SASSA, sound wonderful. It has to go back to where it belongs, which is right now probably between $18 and $20.

If it was between $18 and $20, with some finality on SASSA, we can start building back what the business is all about. And, candidly, the $18 and $20 should go back to $22 to $24. And I want to make sure that this happens, candidly, because I have a lot of shares in the business, number one. And I've spent 30 years of my life on this business. So I have no intention for this business to simply fall into darkness because of the wrong reasons.

So we are working on trying to say, when is the right time to come? And are we going to be able to say what we want to say and to really not simply come and see investors, but rather to do another roadshow, for that matter, almost like if we were reinventing the Company and to say, this is what it's all about. In order to do that, I need to be able to present facts, not something whereby 80% or 60% of my revenue is missing.

So I should take from that, then, that we are not going to see you before the SASSA tender is finalized and the final award decisions have been made?

I'm not saying that because, as you saw yourself, it has already moved back until June 10. My intention was to going to come and see you guys in June anyway. So I'm hoping that it's not going to slip much more than what it has slipped now, which means that we will hopefully, then, still be able to see you guys during the month of June.

Once the tender is finalized and we have filed the tender -- and this is quite a substantial thing to put together. To give you an idea, the last time that we did that, there was more than 11,000 lines, basically, of write-up information that we had to submit because we tendered for all nine provinces. So it's a huge amount of work that has to be put into this thing. I have made this -- this is my [last on] sort of commitment to this thing, and I have to see it through.

Once the tender is filed, I think there will be some time between the tender being submitted and, let's call it, some sort of feedback from SASSA in terms of making formal presentations. And I'm hoping that, during that time period, we will be able to pop over there and to spend a week or so and talk to you guys.

Thank you for answering the question, Serge.

Thank you very much. On behalf of Net1, that concludes the conference. Thank you for joining us. You may now disconnect your lines.