Lesaka Technologies Inc (LSAK) 2011 Q4 法說會逐字稿

Good afternoon and welcome to the Net1 fourth quarter and full year 2011 results. All participants will be in listen-only mode. There will be an opportunity for you to ask questions at the end of today's presentation. (Operator Instructions). Please note that this conference is being recorded.

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

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

Both our press release and Form 10-K are available on our website at www.Net1.com.

As a reminder during this call we will be making forward-looking statements and I request you to look at the cautionary language contained in our press release and 10-K regarding the risks and uncertainties associated with forward-looking statements. In addition, during this call we will be using certain non-GAAP financial measures and we've tried to provide 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-K and in 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 currency fluctuations between the dollar and the rand.

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

Thanks very much, Dhruv. Good morning, good afternoon to all of our shareholders. I'd like to begin with an update of the key trends in the business before I hand over to Herman that will discuss our financial performance in more detail.

To summarize our fourth quarter 2011 results, we reported revenue of $97 million, a year-over-year increase of 42% in US dollars and 28% in constant currency. Fundamental EPS for fourth-quarter 2011 was $0.39 down 28% in dollars and 35% in constant currency.

This quarter continued to be adversely impacted by a new contract with SASSA, which pressured both revenue and profitability. The decline in revenue from SASSA was more than offset by our core transaction based businesses as well as the inclusion of KSNET. Our profitability was pressured year-over-year by the low economics on the SASSA contract and lower margin profiles of some of our acquired businesses during the quarter.

As of June 30, 2011, we had $95 million in cash on the balance sheet bringing our net debt position to $30 million. Operating cash flow during the quarter was $13 million and $66 million for the full year.

In keeping with our communication strategy, our outline on our previous earning call I will focus my discussions on our three groups of businesses namely our established businesses, our growth businesses and lastly, our startup businesses.

First, our core established businesses which includes CPS, KSNET and EasyPay together in the fourth quarter 2011 accounted for approximately 81% of our revenue as well as the majority of our profits. 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 as growth businesses which are smaller but in our view have the potential grow at the rate materially faster than our established businesses over time, this group which is also strategic in nature includes Net1 UETS, MediKredit and FIHRST and collectively account for approximately 7% to 8% of our revenue.

The final subgroup is classified as start-up businesses and currently includes Net1 Virtual Card and XeoHealth. In our view this category has the potential to grow into material drivers for the Company over time.

That being said, let me begin by discussing the current status of our SASSA business. Earlier this month our contract with SASSA was extended for a period of six months to March 31, 2012 under the same terms and conditions as that of the existing contract. SASSA closed the bid submission process on June 27 which is approximately a month after the initial deadline. SASSA has previously indicated that it expects complete -- to complete its evaluation before the end of September and despite the modest delay, we believe they remain on track to meet their deadline give or take a couple of weeks.

As previously mentioned, SASSA has placed restrictions on bidders from providing additional commentary on the bid process. However, in an effort to provide more clarity to our shareholders, SASSA has made some public comments related to the tender which I would be more than happy to share.

First, the expected duration of a new contract is five years. Second, the maximum price bidders can submit the ZAR16.50 per beneficiary per month. Third, bidders must be able to demonstrate a solution that is functional in both urban and rural environment. And last, biometric security is a mandatory condition of the tender.

Just to reiterate, our competitive advantage over any current or potential competition for the diversement of social grants remains our unparalleled infrastructure in rural parts of South Africa combined with a seamless integration with our national EasyPay footprint as well as our technology track record in cost structure.

Strategically and operationally we have (inaudible) short-term contract extensions and tender processes for the past five years with limited impact on our business other than the price and volume reductions agreed to last year.

The process that is currently taking place is not due to Net1 and we understand the difficulties that government experience in evaluating and finalizing any award. Social welfare is critical in South Africa not only from a social and moral point of view but also from a political perspective. Many companies would of course like to enter into this market but barriers to entry such as proven and industrial-strength technologies, rural infrastructure, biometric expertise, interoperability with [CME] based banking systems, [fall-out] identification and prevention and the like, makes it very, very difficult for anyone without this total and complete set of skills to participate in this business in any meaningful way.

It is however our view that our CPS business will continue to deliver bottom-line results for the foreseeable future. A number of beneficiaries paid in our (inaudible) provinces increased modestly in quarter four but has remained largely consistent with fiscal 2011. Additionally, approximately 45% of our beneficiaries have selected to use electronic payment model further reducing the amount of cash used in the system while also growing our rural merchant acquiring revenue.

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 stand-alone 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.

Among the initiatives and the consideration of the introduction of MVC in Korea offering Net1's cryptographic solutions to local financial institutions and certain other value-added services. Quarter four 2011, KSNET financial and operating performance has been consistent with management's expectations.

In quarter four 2011, we continued our special promotion with agents to drive growth particularly in the small- to medium-sized retail end markets. This typically requires higher upfront investments in the form of terminals and incentive payments followed by higher return over the ensuing three-year period. The SME sector also tends to offer better profitability than larger high volume retailers.

Focusing on EasyPay, it remains well positioned to generate sustained and potentially accelerating growth over the next few years. During the fourth quarter, EasyPay signed an additional nine (inaudible) issuers and 1000 plus retailers in gas station locations signed over the past three quarters have just started to be rolled out and will continue to do so through fiscal 2012 adding incremental volume as the rollout of course is executed.

We continue to accelerate the penetration of value-added services allowing us to move further up the value chain and to increase average value per transaction.

In July, we also launched our new website, www.EasyPay.CO.za, which has a very, very strong customer activity materially higher than in the site's history.

Part of EasyPay's strategic plan is to have a seamless multichannel network ranging from physical point of sale locations, Web, kiosk and mobile, and we are making very solid progress in this regard. We will also continue to drive adoption of value-added services, reach out to second-tier retailers, additional municipalities or prepaid utilities, increase our portfolio of available products and create revenue synergies with our MediKredit and FIHRST offering domestically.

For perspective, value-added services, volume is more than double that of traditional card switching and is a real competitive differentiator in this business.

Let me now spending a few minutes on the key trends of our growth businesses starting with NUETS, our subsidiary focused on Africa and the Middle East. First in Iraq, our partner's have been enrolled about 2.1 million cardholders at June 30 and more than 5000 point-of-sale terminals have been sold of which roughly 2700 have been installed.

We continued to experience solid take up in July so the Company has earned highest monthly revenue yet. In addition to existing programs, NUETS was also recently awarded contracts to provide electronic registration and bill payment services for the National Vehicle Licensing Department as well as an award to provide salary distribution for government employees with the first pilot town to be rolled out shortly.

In Ghana, there are now over 600,000 issued cards and roughly [4,500] deployed point-of-sale terminals with 43 financial institutions in the country connecting two per system. The Central Bank is now actively commenced the rollout of e-Zwich to the rural parts of the country.

In fiscal 2012 barring any delays unforeseen delays due to any certification authorities, NUETS will commence international (inaudible) to Ghanaians, recipients from senders from the US and Europe. Elsewhere on the continent, NUETS continues and is actively pursuing a number of tenders in more than half a dozen countries and we are confident that they will be successful in at least a few of those.

For MediKredit in South Africa, quarter four 2011, during quarter four of 2011, our revenue declined year-over-year as the customer migration announced last year was affected this quarter but given some of its local initiatives, it has begun to grow on a sequential basis.

MediKredit continues its rollout with public sector hospital in several provinces and is aggressively pursuing the remaining regions. It has also become responding to the needs of other countries in Africa as well as commencing revenue synergy opportunities within the group.

XeoHealth, our healthcare claims processing subsidiary in the US, has begun to make realistic inroads in its market as the result of the opportunities created by Health Care Reform and our investments in growing visibility and capabilities. We are aggressively going to market directly in some instances and in partnership with other companies with sector expertise in others.

FIHRST continues to expand its base of customers adding nearly another 80 employees with over 25,000 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, we took difficult decision to downsize the workforce during this quarter and refocus the unit on commercializing our MVC technology on a global basis. We are very pleased at the partnership with Banamex, a unit of Citigroup and the leading financial institution in Mexico, which was announced last month. Banamex will roll out the MVC technology to the millions of credit and debit cardholders and we expect to have the system go live early in calendar 2012.

Finally turning to VCpay in the US, our program with MetroPCS continues to gain traction, albeit slowly. MetroPCS has now equipped more than two million handsets almost double that from last quarter. Marketing initiatives have yet been limited and we expect to make further investments to drive market awareness, adoption and ultimately usage.

While we now have over 10,000 registered users of, there is a lot more to be done. We will also look aggressively for additional partners and distributors as we continue to believe MVC is simplest, safest and functionally -- functional mobile payment product in the market.

In addition to the investments we will make in MVC during fiscal 2012, we also plan to invest in our XeoHealth and Kiosk projects all of which management believes address relevant and growing market needs and in turn drive long-term growth for Net1.

Most of the investments relate to scaling up our management and sales and marketing teams as well as localized marketing campaigns and infrastructure to support anticipated growth. At this time we believe we have most of the major building blocks to drive long-term sustained growth and prefer to use our cash to fund internal investments rather than to pursue any other large acquisition. That said, we will still continue to consider small strategic acquisitions that can help penetrate new customer segments or add to our distribution channels.

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 the true valuation of the Company. I believe that our management team, our technology and our diversification strategy in terms of currency, country and market segmentation will allow us to regain -- Net1 to regain its initial appeal with a lower risk profile and thus deliver improved returns for its shareholders.

With that let me turn over to Herman. Herman?

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

For the fourth quarter of the 2011, our average Rand dollar exchange rate was ZAR6.81 to the dollar compared to ZAR7.56 a year ago, and this positively impacted our US dollar-based results by approximately 10%. The comparability of our financial results for the fourth quarter of 2011 is complicated by the effects of the change in SASSA economics, once off non-cash taxation adjustments, the impact of the KSNET acquisition and a stock compensation reversal. The acquisition of KSNET has assisted us to diversify many of the risks associated with our business including currency customer concentration and countries risks.

As is now known, our new SASSA contract negatively impacted revenue and income during the fourth quarter of 2011 with all of the reduction in revenue dropping to the bottom line. We have now anniversaried the new contract and expect the SASSA trading performance to be relatively stable year over year in fiscal 2012.

During the fourth quarter 2011, we provided a valuation allowance related to the Net1 UTA deferred tax assets of $8.9 million due to (inaudible) losses by Net1 UTA. I would like to add that we believe that the recently signed Banamex deal will offset these losses slightly but at this time, we do not believe this incremental income generated will be sufficient to fully cover our cost base of this unit which has been reorganized.

I believe that the impact of our KSNET acquisition on our quarterly results is fully understood but for completeness, I will iterate that this acquisition has resulted in additional intangible asset amortization including related deferred tax as well as an interest charge which were not included during the fourth quarter of 2010.

The last significant non-comparable item this quarter was the reversal of approximately $3.5 million of stock-based compensation charge primarily as a result of the forfeiture of a one-third or approximately 200,000 shares of the performance-based restricted stock granted in August 2007.

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

On a consolidated basis for the fourth quarter of 2011, we reported revenue of $97 million, an increase of 28% in constant currency and 42% in US dollars. Fundamental earnings per share of $0.39 in the fourth quarter of 2011 declined 35% in constant currency and 28% 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 30% during the fourth quarter down from 41% a year ago primarily due to lower economics in our South African pension and welfare business and the inclusion of KSNET which has a lower operating margins than our legacy South African businesses.

Our effective tax rate of 92% for the fiscal year of 2011 is the cumulative result of the Net1 UTA deferred tax valuation allowance and non-deductible items relating to the acquisition of KSNET and the interest expense on our Korean debt facility. We expect the effective rate in fiscal 2012 to be between 40% and 45% with the major permanent differences remaining to be the interest charge and the stock option expenses.

Within the segments, South African transaction-based activities posted revenue of $50 million during the fourth quarter of 2011, 10% lower in local currency and flat in dollars as lower revenue from SASSA was largely offset by an increased contribution from EasyPay and stronger growth in our rural merchant acquiring business.

In the fourth quarter of 2011, our acquisitions of MediKredit and FIHRST together contributed approximately 7% of total segment revenue. In constant currency, segment operating income excluding amortization decreased by 28% from Q4 2010 while operating margin declined 11 percentage points to 43% due to the lower profit margins in pension and welfare, MediKredit and FIHRST.

Moving to our operating metrics during Q4 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 fourth quarter, we processed a total of ZAR3 billion through our network on a completed pay cycle basis flat on a year-on-year basis.

The productivity of our 4,921 installed terminals declined to 992 transactions processed per POS device during a completed pay cycle from 999 during Q4 2010 due to the addition of 127 more POS terminals over the past year in line with the increased demand from merchants to offer this important service to customers.

In Q4 2011, EasyPay processed 175 million transactions with an approximate value of ZAR44 billion, an increase of 5% compared to 167 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 this quarter.

Our other South African processing businesses processed 8.2 million transactions worth ZAR20 billion. Our international transaction-based activities posted revenue of $28 million during Q4 2011. KSNET contributes the majority of the revenue and operating income in this segment. Segment operating income also includes additional startup expenditure related to the launch of our Mobile Virtual Card initiative in the United States.

For fiscal 2011, KSNET generated revenue of $68 million and EBITDA of $18 million. Given management's efforts to focus on smaller but higher margin retailers, KSNET EBITDA margin in Q4 2011 was 26.2% in this quarter, slightly lower sequentially from the previous quarter margin of 28.7%. These margins may fluctuate over time as KSNET has to invest in POS terminals, review agent commissions and implement special promotions continuously to remain competitive and retain and grow market share.

Our Smart Card account segment posted revenue of $8.6 million in Q4 2011, a 1% year-over-year decline in constant currency. The total number of active Smart Card accounts was 3.6 million, an increase of 1% from last year and relatively flat over the last four quarters. Operating margins for the segment remained consistent at 45%.

For our Financial Services segment, revenue in Q4 2011 increased 67% year over year in constant currency to $2.3 million principally as a result in an increase in a number of UEPS loans provided.

Segment operating margin for Q4 2011 was consistent at 79% when compared to Q4 2010. As a reminder we provide short-term loans to our pensioners in only two of the five provinces we serve. The ability to offer these loans to pensioners is highly regulated and we do not anticipate rolling out additional provinces until (inaudible) is concluded. As a result, we would expect this unit to continue to generate lower double-digit growth in fiscal 2012.

Following at length the multiyear application process, we have finally secured ownership of our South African life insurance license with the intention to expand our financial services offering to our customers. The establishment of this new business line may reduce our margins in this segment for a few quarters until the business becomes profitable.

Our final operating segment is Hardware and Software which includes revenues that occurred on an irregular once-off basis which makes it difficult to predict sales and margins from year to year. While the various businesses in the segment do have external customers, the segment provides ongoing support to the customers of the transaction-based business.

For modeling purposes, we expect the segment to be mildly profitable excluding Net1 UTA where we have executed a restructuring plan to contain costs, the benefits of which should be realized over the next few quarters.

Segment revenue in Q4 2011 was $8.3 million representing a 22% year-over-year decline in constant currency. Operating margin excluding intangible asset amortization and a $0.8 million restructuring charge for Net1 UTA for this segment decreased to negative 16% from negative 11% in Q4 2010.

Our Q4 2011 interest expense of $2.5 million includes $2.3 million related to the debt raised for the KSNET acquisition and is currently non-deductible for tax purposes.

As of June 30, 2011, we had $95 million of cash and equivalents on our balance sheet. During Q4 2011, we generated cash flow from operations of $13 million. In Q4, we also repurchased 125,000 shares for $1 million out of our $100 million authorization.

We incurred capital expenditures of $5.6 million mainly at KSNET and EP Kiosk. We expect our first-quarter 2012 capital expenditure to be approximately $18 million to $22 million and will be used primarily to invest in growth at KSNET and EasyPay.

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 debt repayments. At this point, we do not envision the need to make any sizable acquisitions but will continue to consider smaller strategic deals that will enable us to accelerate growth and profitability.

Our fully diluted weighted share count for Q4 2011 was 45.2 million shares, 1% less than a year ago. During fiscal 2012, we anticipate growth of KSNET and EasyPay and some of our smaller units. However, we expect our pension and welfare business to remain flat on our earnings growth to be write down by our meaningful investments in MVC, XeoHealth, EP Kiosk.

As a result of these factors and assuming our existing contact with SASSA remains in effect for the full year on the existing terms and conditions, we would expect to generate fundamental EPS of at least $1.55 on a constant currency basis in fiscal 2012.

Before we open up for questions, please remember that we are restricted from making any comments related at to the SASSA tender specifically.

With that, we are opening the call for Q&A.

(Operator Instructions). Dave Koning, Baird.

I think Serge mentioned early in the call that the one thing that SASSA did mention was that the price might be around ZAR16.5 per distribution. And I think right now -- you haven't given it formally -- but I think in the ballpark of ZAR25 per distribution if you include both your Smart Card portion and the transaction-based portion. And if we think about the 40% margins, it means basically you have about ZAR15 of cost per transaction.

So and I guess during the comments too you said all the pricing decline falls to the bottom line. So if we are talking ZAR15 of cost and the revenue would only be ZAR16.5, are we thinking in the right ballpark that this could be a very low margin piece of work coming from currently very high margins? Or am I reading something into it that might not be correct?

I think it's -- everything you said by the way in your logic is 100% correct. There are obviously a number of -- a number of factors that are in the tender that we in theory cannot really disclose too much but there are things that are well-known. The first one that you have to consider is that we would be moving from 3.5 million or 3.2 million, 3.3 million clients to 10 million clients. Because certainly our bid is based on the entire country and not only the five provinces we currently have. That is quite an important one.

The second one which I think is very important is that we would both be paying people in rural areas as well as urban areas and the cost of paying in urban areas is fundamentally less than that in rural areas. Which means if you mix the two together, the ZAR25 that you are talking about really at this point in time was what we were charging for rural areas and of course where the costs are the highest. So as a blended rate, you find that suddenly your costs actually go down quite substantially.

The third thing which I think is also very important and not really been discussed in detail is that -- and there is a published document under the SASSA website so I don't think there is any problem in me mentioning it -- is the fact that any new tenderer that is using on infrastructure must not charge beneficiaries any transaction fees whilst the beneficiary is using that infrastructure.

But if the beneficiary decides to use the infrastructure that does not belong to the actual winning tenderer, then the winning tenderer can charge a cost to that beneficiary which also would imply that if beneficiary is specifically the ones in urban areas commence to utilize for example bank ATMs rather than our ATMs or our merchants, that particular cost of transacting would actually go directly to them and therefore, sort of take off any major burden of the cost of that transaction to us.

So I can't say much more than that right now. There are a few other parameters which I think also [bear in] the equation. And I think all that your initial logic discussion is 100% accurate, the result of the award of the SASSA tender to us, we do not believe would be anywhere close to the sort of the disaster that you would have painted.

Right, right, that made --. Yes, especially when you mention you could potentially triple the beneficiary and have lower cost on average than what you do now. Is it kind of a foregone conclusion at this point that it is all or nothing that the winner gets the whole 10 million beneficiaries or -- and the others don't get any? Is that kind of the way you are thinking of it?

It is very difficult, this tender being very political very often it is very difficult to know what will happen. Certainly I think we have put a case forward whereby SASSA wants to get the best possible price. They want to get ubiquitous technology. In other words, a technology that allows anybody to be paid anywhere and they want to guarantee the elimination of fraud across the whole country, in other words by not creating -- or by introducing different technology cost solutions. Then I think it only makes sense to actually have only one person or at least one technology at least being used across the whole country even if a number of people could possibly use the technology to make our payments.

So we certainly have made a case that it has to be one technology and we've also made up the case of course, it should be us that should provide all of the payments. There may be a variation of that but then if there is a variation, [I think it] will substantially increase the cost to SASSA overall, which means if they are seeking the best possible price, I think they will have to move to the former rather than the latter option.

Just from my side just to add to that, I think the other thing that you have to keep in mind and that could have quite a significant impact on the margins of any future SASSA business is obviously our ability to provide additional services in the form of either additional financial services or banking related services to those beneficiaries. And of course that would again be done on a fairly massive scale compared to what it is today if it is across all country.

Okay, that makes sense. No, that is great. And I guess the second question is, the guidance is kind of flat to up -- I guess up slightly EPS. I would have thought that the chance would have been for a little more EPS growth if you are assuming SASSA is pretty stable this year. But if hardware is going to be less of a drag, if you get growth out of EasyPay, you've got KSNET and some of the other acquisitions get more profitable. And then if you just use your cash flow to pay down debt, it just seems like all of those things are nicely accretive but yet you are really not guiding to much of an EPS growth. I guess its investments but maybe you can just talk a little bit about the thought process.

Sure, obviously when we look at the guidance that we are comfortable to provide at this early stage of the year, we look at a number of factors. One of those of course is the internal budgets prepared by the Group and those obviously normally prepared on a fairly conservative basis. So that's forms a peg in the ground that we look at. We also look at all of the other permutations that will ultimately have an effect on the measurement of earnings per share (inaudible) obviously one of that where there are really two major components, right? The one is profitability and the other one is the share count.

And I think at this early point in the year, it is difficult for us to accurately predict which one of those two will move in a positive direction or a more positive direction than the guidance that we have currently provided. And obviously we will be revising this guidance as we progress through the year. It is very early days for us, there is a lot of additional information that we believe that we will have during the course of the next two months or so until our next earnings call.

But right now we felt that we are comfortable to provide this fairly flat number factoring in a very flat SASSA growth rate or curve based on our assumption that the tender award process may take longer than originally anticipated. We know that we have the six-month extension until March next year.

One of the things that will play another important factor of course is if they stick to the timeline envisaged, what the phase-in/phase out requirements makes during the next three months or the last quarter really of this current fiscal year.

So all in all, we are very comfortable providing the $1.55 guidance right now and we will revise that as we gather more information and as we become more comfortable over the course of the next few months.

And Dave, it's Dhruv, just to add to Herman very quickly, I mean SASSA is just over 40% of our business. And if that is relatively flat on a fundamental earnings basis as well hardware and software has been relatively flat in terms of breakeven level. So that is not really going to change, which means you've got the upside coming from KSNET and EasyPay offset by some of the investments we have talked about.

Great, thank you.

(Operator Instructions). Tom McCrohan, Janney Capital Markets.

Yes, hi, just following up on SASSA. The 10 million potential beneficiaries that you could potentially serve under this new contract, how many of those -- can you give a breakdown between rural and urban?

Sure. At the moment and again, South Africa defines rural and urban very differently to many other people. Rural depending how you look at it is anywhere with -- where normal infrastructure is not present. In other words, it can be the number of telephone lines per capita. It could be the fact that they use electricity. It could be the fact they use water. So sometimes when we talk about rural, we normally refer to deep rural, which are areas which are not really cities or towns but really small villages which are really in the middle of nowhere.

And then we talk about rural which are not necessarily small towns could be agglomerations of sometimes one million people but that have absolutely no or very little infrastructure.

Now if we group those two together, right now the split in terms of pension and welfare is probably 55/45. So it is 55 would be rural and 45 would be urban. So I don't know if that gives you a view but that is more or less -- I mean let's try to put it a different way for you.

Today we pay 3.5 or so million people utilizing in excess of 11,000 pay points. In other words, places of payment which are all in what I call deep rural areas. Out of these 3.5 million, if you think that there are opportunity 9.6 million/9.7 million people, the rest of the people are split between today whereby one could say people are being paid through bank accounts or through ATMs for lack of a better word and the other 3 million are paid through other forms of pay points. Mainly fixed pay points rather than movable pay points like ours.

So you are looking at almost -- as I say, close on 60% -- 55% to 60% are really what we would define as rural and the rest is urban.

Okay, thank you, Serge. And my apologies, I got distracted when you started answering David's question on the terms of this potential contract. So I didn't hear your answer when you he was asking you have the opportunity now to -- although there might be a pricing -- although they are telling you there is pricing cap -- but it sounds like they are going to award -- potentially award you more beneficiaries.

So can you kind of talk through that again like is that a certainty that when they award the contract whoever gets it gets the whole -- all the provinces or is that not certain?

I think in quick summary, I think we have all experienced over the last five years at least very much uncertainty in terms of contracts being awarded or not being awarded. So let's not put 100% on the fact that the contract will be awarded at all, that is the first thing.

And there are many, many, many reasons both politically as well as from all sorts of other points of view why that might not happen. We still feel at this point that it will happen. Okay.

Now number two, we basically said that for SASSA to achieve the lowest possible cost to achieve ubiquitous system namely where any pensioner can get paid anywhere in the country rather than specific places and specific provinces and to also minimize fraud and to eliminate in fact fraud, it is not possible to do it with diverse different technology cost solutions.

So what we have basically said and we have made I think an 80 page proposal summary to SASSA to say the only way that you are going to achieve those goals is if you have at least one technological platform. The second part of the equation is who or how many people could possibly use that technological platform?

We have also made a case that obviously by simply the average of numbers, there is absolutely no doubt that if we had to pay everyone, we believe we can reach the absolute minimum price as far as SASSA is concerned. If they decide to award the payment part rather than take the technological part to multiple entities, it will certainly raise the price to SASSA to some extent and therefore, we might not do all of it or may not do all of it. But I don't think that would necessarily affect our profitability.

What I'm just trying to reconcile, Serge, is if SASSA told all the bidders that the maximum price is ZAR16.50 and given that we all know that the cost to deliver is extremely different in urban versus rural, when they made that statement, why would they deprive -- why are they limited to one price for someone who has a cost to deliver much higher in rural versus urban?

It seems like that is just not intuitive to me why they would do that. Unless they are moving forward with the assumption that whoever wins this gets everything.

Well I think your inference is the same as ours. And the reason for that is I think SASSA realizes that it is unlikely that what I would call formal institutions in South Africa are going to go out and enter into the business of deploying infrastructure in deep rural areas or even rural areas. It is incredibly expensive, it takes a huge amount of time, which means they are not going to do that.

So SASSA realizes for example, [EBANK] is quite comfortable to provide an ATM card with a magstripe on the back of it and a PIN number which can be utilized in an urban infrastructure. The problem is, what money are these banks going to put toward funding infrastructure in rural areas.

So I think SASSA has realized that if they try to split the two from each other, what will end up happening is that they will appear to be saving money in rural -- in urban areas but it's going to cost them an increasing amount of money to actually continue to pay people in rural areas.

On top of it, the two technologies will not interoperate because banking systems don't work in rural areas because they work online rather than off-line. They do not do our biometric security which means fraud prevention and fraud eradication will not be possible which means the overall cost to SASSA will actually be much higher than if they are to award it to someone that can have a technology that can work in both areas.

So we read it the same way as you read it namely that SASSA is saying, we want someone that is going to come into giving the country a solution that can work everywhere not simply the solution that suits them to make bigger profit up to what they currently have without having to make any further investment where they are not. And that is certainly the way we have read it and that is certainly the way that we have got for our on-solution to them.

And my last question, do you have any insight to the number of bidders on this contract, and is it the same pre-existing providers?

Let me say to you that that I can't tell you the exact number but it is very close to 2000. Okay. In fact, that is 2000 minus one. So there are certainly a number of bidders but we have the normal standard bidders. Normally every time we have ever bid for any contract in South Africa, there is always approximately 20-odd bidders.

How many of those bidders are serious bidders is probably half a dozen, and out of these half a dozen, how many of them have got any real track record is probably two or three of them. And out of those two or three of them, how many of them can provide what we believe are the current requirement of SASSA? As far as I am concerned, there is only one.

So that gives you a bit of an idea. I think this is a business everybody would like a piece of. And fortunately this isn't a business that you can afford to piecemeal or pick and choose the little piece that you think you want to do. You have got to be able to take the good and the bad at the same time. And I don't think there are too many people from a technology point of view, a financial point of view, expertise point of view that can actually do both except a Company like ours.

Fair enough, thank you.

(Operator Instructions).

Okay, Priya, if there is no further questions, then we can conclude the call. This is Dhruv Chopra, you can always reach me by e-mail or phone and I will get back to you. Thanks.

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