Lesaka Technologies Inc (LSAK) 2012 Q1 法說會逐字稿

Good day and welcome to the Net1 conference. Please note that all participants are 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, Dillon. Good morning and good afternoon to our investors around the world. Thank you for joining us on our first quarter fiscal 2012 earnings call. With me today are Dr. Serge Belamant, our Chairman and CEO, and Herman Kotze, our CFO.

Both our Press Release and Form 10-Q are available on our website www.net1.com.

As a reminder, during this call we will be making forward-looking statements and I request you to look at the cautionary language contained in our Press Release and Form 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 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 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 to all of our shareholders. Let me first begin with an update of the key trends in the business before I handover to Herman, who will discuss our financial performance in more detail.

I'm pleased with our first-quarter 2012 results. We reported revenue of $100 million, the year over year increase of 55% in US dollars and 49% in constant currency. Fundamental EPS for quarter-one 2012 was $0.44 US, up 23% in dollars and 17% in constant currency.

(Inaudible), our products in volume concession to SASSA at the end of fiscal 2011, we posted modest growth in our pension and welfare business during first quarter of 2012 driven by a double-digit increase in our rural acquiring business and operational efficiencies on the cost side.

In Q1 2012, KSNET posted double-digit revenue gains although operating income growth was modestly lower as we continued our special promotion to drive penetration in the small and medium merchant market the benefit of which we expect to see through the remainder of fiscal 2012.

In the quarter, we also began refocusing EasyPay towards higher-margin value-added services and the transactions. We have identified as discontinued by its lowest margin transactions.

As a result, we expect some, but largely immaterial impact on the operating income of the business but an improvement in its margins. I'm also extremely pleased that our XeoHealth subsidiary signed its first two contracts in the US healthcare market validating the investments we are making in that specific business.

As of September 30, 2011, we had a $102 million of cash on the balance sheet bringing our net debt position down to $9 million from $50 million last quarter.

Operating cash flow during the quarter was $27 million. In keeping with our communication strategy, our outline on our previous earnings calls, I will focus my discussion on our three groups of businesses. One, our establish businesses. Two, our growth businesses and lastly our start-up businesses.

First, our core established businesses, which include CPS, KSNET and EasyPay, together in Q1 2012, accounted for approximately 79% of our revenue, as well as a majority of our profits as of today. These larger and more mature businesses either are or have the potential to generate at least double-digit growth constantly overtime.

The second subgroup we classified as growth businesses which are smaller, but in our view have the potential to grow at a rate materially faster than our established businesses overtime. This group which is also strategic in nature includes Net1 UETS, MediKredit and FIHRST and collectively account for around 8% of our revenue.

Final subgroup is classified as start-up businesses and currently include Net1 Virtual Card and XeoHealth. In our view this category has the potential to grow into material drivers of Company growth overtime.

That being said, let me begin by discussing the current status of our SASSA business. Our contract with SASSA is currently valid through March 31, 2012 and operating under the same terms and conditions of the previous contract.

SASSA closed the bid submission process on June 27, which is approximately a month after the initial deadline. SASSA previously indicated that it expected to complete its evaluation before the end of September and although that time is passed, we are yet to see any evidence that the award of such a tender is dramatically or will be dramatically delayed.

Last week SASSA did, however, request the validity of our bids to be extended to March 31, 2012. And we've agreed accordingly, I don't believe we should read anything into that all. It does not necessary suggest that SASSA is unlikely to award the contract before the end of March. But to sought to them the time to not only award the contract, but also finalize the service level agreements with the selected winner or winners.

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

Strategically and operationally, we have dealt with short-term contract extension and tender processes for the past five years with limited impact on our business other than the price and volume reductions agreed to in 2010.

The process that is currently taking place is not new to Net1 and we understand the difficulties that government experiences 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 like to enter this market, but barriers to entry such as proven and industrial strength technologies, rural infrastructure, biometric expertise, interoperability with the EMB standard, foreign identification and prevention and the like, make it difficult for anyone without this complete set of skills to participate in any meaningful way.

It is therefore our view that our CPS business will continue to deliver bottom line results for the foreseeable future, in one way, in one form or the other.

The number of beneficiary paid in our far provinces increase modestly in quarter one, and has shown incremental growth over the past four quarters.

In quarter one, we migrated a lot more beneficiaries to our electronic payment infrastructure, growing penetration to just under 50% from 45% last quarter ensuring a double digit increase in 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 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.

Among the initiatives under consideration are the introduction of MVC in Korea offering Net1's cryptographic solutions to local financial institutions as well as the certain value-added services.

In quarter-one 2012, KSNET grow revenue at a low double digit rate. While operating income growth was modestly lower as we continued our special promotion with agents in quarter one.

We expect these special promotions to drive growth particularly in the small- to medium-size retailer market and anticipate seeing the benefit over the course of fiscal 2012.

For EasyPay, quarter-one 2012, we begin refocusing the business towards higher margin value-added services and away from low margin transaction processing such as hosting for certain financial institutions that generated roughly one ZAR0.01 per transaction. Such actions have more of an impact on our volume but little bearing on profitability. We continue to accelerate the penetration of value-added services allowing us to move further up the value chain and in turn increase average value per transaction.

Our strategic acquisition of the South African prepaid electricity and airtime business at Eason and Son on October 3, 2011 will further strengthen our position in a value-added services market.

Part of EasyPay strategy plan is to have a seamless multi-channel network ranging from physical point of sale locations, Web, kiosk and mobile, and we are making very solid progress in this regard and integrated our EP Kiosk. Initiative into EasyPay during quarter one.

Our new EasyPay website continues to attract a substantial increase in transaction visitors. Overall, online volume is still relatively low as a percentage of the total and the issue we had in quarter one.

With one of our card issue with online prepaid airtime transaction was suspended for one week due to (inaudible) was A) reversed following the realization at EasyPay systems with secure and not responsible for any fraud and B) had little impact in any case on our overall volumes.

We will also continue to increase our portfolio of available products at EasyPay and create revenue synergies with our MediKredit and FIHRST offering domestically.

For perspective, value-added service volume is more than doubled that of traditional card switching and is the real competitive differentiator in this business.

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, where we rollout opportunity of 2.2 million cardholders as of September 30.

During the quarter transaction, volumes grew 58% year-over-year, while transaction revenue grew 43%. Additionally, NUETS continues to grow in its services offering in the country.

During the quarter, NUETS developed new limited investment software as a service business model and to reduce upfront capital investment, while potential developing country customers, while accelerating time-to-market.

NUETS remains actively engaged with a number of countries in Africa and the Middle East and we expect them to rollout the new business model in a couple of new countries during fiscal 2012.

For MediKredit in South Africa, in quarter-one 2012, volume grew 12% year over year, driven by gaining momentum of its rollout across both public and private sectors.

It also begun engaging countries in Africa as well as commencing revenue synergies or opportunities within the Group.

XeoHealth, our healthcare claims processing subsidiary in the US, has begun to make realistic inroads in its market as a result of the opportunities created by Health Care Reform and our investments in growing visibility and capabilities.

Xeo has recently signed two deals in the US, one with CBH, who is contracted to the city of Philadelphia to handle the claims processing as one of the subcontractors to Cognosante.

The US provider of health IT services to State and Federal agencies, to offer recovery audit contractor services to the North Dakota Department of Human Services leveraging our XeoHealth claims application engine.

FIHRST continues to expand its base of customers, adding over 20 employers with more than 15,000 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 decisions to downsize the workforce further during the quarter and refocus the unit on commercializing our MVC technology on a global basis.

We are very pleased with the partnership with Banamex, a unit of Citigroup and the leading financial institution in Mexico, which was announced in July.

Banamex will rollout our MVC technology to the millions of credit and debit cardholders and we expect to have a system go live early in calendar 2012.

Finally turning to VCpay in the United States, our program with MetroPCS continues to gain traction, albeit slowly. MetroPCS are now equipped more than two million handsets.

While we have over 15,000 registered users up from 10,000 last quarter and rolled out a carrier at agnostic IP for Iphone version in quarter one, there is more to be done.

To that effect, we have recently engaged the services of specialties advisory firm to a system of the general management of VCpay in the US, the identification of various strategic channel and the commercialization of VCpay in our target industry verticals.

In addition to the investment we made in MVC during fiscal 2012, we will continue to invest in our XeoHealth and Kiosk projects all of which management believes the risk 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.

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 evaluation 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 Net1 to regain its initial appeal with a lower risk profile and thus deliver improved returns for its stakeholders.

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

Thank you, Serge. I will discuss the key results and trends for the first quarter of 2012 compared to the first quarter of 2011. 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 Q1 of 2012, our average rand-dollar exchange rate was ZAR7.9 compared to ZAR7.41 a year ago, and positively impacted our US dollar based results by approximately 4%.

The comparability of our financial results for Q1 2012, complicated by the impact of the KSNET acquisition, improved hardware and software operating income and margin and a non-cash profit.

The acquisition of KSNET has assisted us to diversify many of the risks associated with our business including currency, customer concentration and country risks.

We have now anniversaried our new contract with SASSA and as expected saw a modest year-over-year improvement in its trading performance in Q1.

I believe that the impact of our KSNET acquisition on our quarterly results is fully understood, but for completeness, I will reiterate that this acquisition has resulted in additional intangible asset amortization including related deferred tax as well as an interest charge, which was not incurred during the Q1 2011.

The last significant non-comparable item this quarter was the $4 million non-cash profit resulting from the liquidation of our operations in Nigeria.

We decided with our partners in Nigeria during fiscal 2011 that we would windup our activities due to our partners lack of adequate distribution channels and the final liquidation of the Company resulted in the write-back of the various shareholder loans.

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 amortization of intangibles, net of tax, stock compensation charges and unusual non-operating or non-cash flow items when we calculate this measure.

On a consolidated basis for the first quarter of 2012, we reported revenue of $100 million, an increase of 49% in constant currency and 55% in US dollars.

Fundamental earnings per share of $0.44 in the first quarter of 2012 increased 17% in constant currency and 23% 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 32% during the Q1 2012, flat with a year ago.

Our effective tax rate of 35% for Q1 2012 was favorably impacted by the $4 million profit on the liquidation of the Nigerian operations, but is negatively affected by the non-deductible interest expense on our Korean facility.

Excluding the non-taxable book profits from Nigeria, our effective tax rate in Q1 was approximately 50%. We continue to expect the effective rate in fiscal 2012 to be between 40% and 45%.

Within the segments, SA transaction-based activities posted revenue of $50 million during the Q1 2012, 6% higher in local currency and up 11% in dollars driven by modest growth in (inaudible) and improving performance at MediKredit and FIHRST.

In constant currency, segment operating income excluding amortization increased by 8% from Q1 2011 due to modest revenue growth and operating efficiencies while operating margin excluding amortization of intangibles was flat at 43%.

Moving to our operating metrics during Q1 2012, we posted a total of ZAR3.4 billion through our network on pay cycle basis, up 16% on a year-over-year basis. The productivity of our 4,867 installed terminals increased to 1,014 transactions processed per POS device during a completed pay cycle up from 985 during Q1 2011 due to higher demand from the pensioner base as well as from merchants to offer this important service to their customers.

In Q1, management decided to refocus EasyPay on higher margin value-added services and have subsequently classified some of our commoditized services as discontinued.

During the quarter, EasyPay core transactions were 109 million transactions down 2% as a result of difficult year-on-year comparisons for the soccer World Cup in South Africa last summer.

Given the higher value-added nature of the core business, however, transaction value worth ZAR26 billion increased 7% from last year.

Our other South African processing businesses grew volume 8% to 8.7 million transactions. Our international transaction-based activities posted revenue of $50 million during Q1 2012. KSNET contributes the majority of the revenue and operating income in this segment. Segment revenue also includes contributions from transactional revenues in Iraq, XeoHealth, and Net1 VCC.

Segment operating income includes additional startup expenditure related to the launch of our Mobile Virtual Card and XeoHealth initiatives in the United States and Mexico.

For Q1 2012, KSNET generated revenue of $29 million and EBITDA of $8 million. Given management's efforts to focus on smaller, but higher margin retailers, KSNET EBITDA margin in Q1 2011 was 27.2% in this quarter, higher sequentially from the previous quarter margin of 26.2%. These margins may fluctuate over time as KSNET has to invest in point-of-sale 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 $8.3 million in Q1 2012, a 1% year-over-year decline in constant currency. The total number of active Smart Card accounts was 3.6 million, flat from last year and relatively flat over the last four quarters. Operating margin for the segment remained consistent at 35%.

For our Financial Services segment, revenue in Q1 2012 increased 62% year over year in constant currency to $2.1 million principally as a result in an increase in a number of UEPS loans provided.

Segment operating margin for Q1 2012 increased to 67% from 64% in Q1 2011. 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 the pensioners is highly regulated and we do not anticipate rolling out additional provinces until such a tender is concluded. As a result, we would expect this unit to generate lower double-digit growth for the remainder of fiscal 2012.

On July 1, 2011, we acquired SmartLife for $1.8 million and this acquisition will allow us to expand our range of financial services offerings to our customers. The establishment of this new business line may reduce our margin in this segment for a few quarters until the business becomes profitable.

Our final operating segment is Hardware and Software, which includes revenues that occur 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, this segment provides ongoing support to the customers of the transaction-based business.

On an annualized basis, we expect this segment to be relatively flat from a revenue standpoint, unless we signup new countries and margins excluding Net1 Austria should be in the low single digit range.

Segment revenue in Q1 2012 was $9.4 million representing a 7% year-over-year decline in constant currency. Operating margin, excluding intangible asset amortization for the segment, increased to 22% from 0% in Q1 2011 driven by an increase in higher margin adhoc South African based contribute to hardware and software sales. These adhoc sales by definition arise from time to time and are not predictable nor sustainable overtime.

Our Q1 2012 interest expense of $2.6 million includes $2.4 million related to the debt raised for the KSNET acquisition and is currently non-deductible for tax purposes.

As of September 15, 2011, we had $102 million of cash and cash equivalents on our balance sheet. During Q1 2012, we generated cash flow from operations of $27 million. In Q1, we also repurchased 181,000 shares for $1.1 million out of our $100 million authorization and spent $1.8 million to acquire SmartLife.

Subsequent to quarter end on October 3, 2011, we also acquired the South African prepaid and existed in airtime business from Eason and Son for $4.6 million in cash and we integrate this acquisition into our EasyPay business. We will pay our first principal payment under our Korean facilities of $7.2 million on October 31, 2011.

We incurred capital expenditures of $4.5 million mainly at KSNET and EP Kiosk. We expect our first-quarter 2012 capital expenditure to remain unchanged in 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.

Just a quick correction, core EP volume was 109 million transactions not 119 million as I stated earlier.

For fiscal 2012, our fully diluted share count for Q1 2012 was 45.1 million shares, 1% less than a year ago. For fiscal 2012, assuming our existing contract with SASSA remains in effect for the full year on the existing terms and conditions, we would now expect to generate fundamental earnings per share with at least $1.60 on a constant currency basis for fiscal 2012.

For reference, the basis for our constant currency guidance is ZAR7 to the dollar which was our effective rate for fiscal 2011. Swings in the actual exchange rates may cause our reported results to vary.

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

With that, we are opening the call for questions and answers.

Thank you very much, sir. (Operator Instructions). David Koning, Robert W. Baird.

Good job.

Thanks.

And yes. My first question just in Q1 margins in the transaction-based service or EBIT of 20 million was pretty strong. Is there any reason not to expect that type of level of EBIT continue through the rest of the year? I know FX rates can obviously fluctuate that a bit, but is there anything really in that number that is not sustainable or is that a pretty good proxy for how we should expect it to go forward?

David, for the rest of the year obviously a couple of factors that we have to take into account. One of them is obviously the fact that in the transaction-based segments we have the SASSA activities that we will continue and obviously the contract is valid until the end of March. But assuming that life carries on as the usual for the three months, for the fourth quarter until the end of the year, I think that those margins are pretty much in line with what they are today and should continue to go forward.

The other elements of that specific segment obviously or significant elements include EasyPay. There is no doubt that the refocusing about EasyPay activities will have some impact on the volume of transactions that we process, but not necessarily on the margin, specifically the EBITDA margin of that specific business. And I don't expect that to have an overall major impact on the activities of the transaction based segment for the rest of the year.

And of course, we have MediKredit, which is a solid contributor as well as first and I think that for the visibility that we have for the rest of the year in South Africa specifically and taking into account the fact that we are about to go into a fairly quiet period from the summer holiday point of view although that's obviously good for EasyPay, it does signal quieter time for some of the other transaction processes. But I think overall if we take a three-quarter view to the end of the fiscal year, we should be able to maintain these margins.

Okay, good. And then secondly, you kind of touched on hardware. After several quarters of about $2 million loss at each quarter, this quarter you swung into a $2 million profit, which is encouraging. But I think you talked a little bit about how that might be unsustainable. Maybe you could just talk a little bit about what you're expectations are going forward. Do you think you can at least maintain profitability and why was it so strong again in Q1?

Well, the business is pretty lumpy. And it's always unfortunately determined by the requirements from some of our customers who have never placed orders on a piecemeal basis. So we find that especially as far as the banks are concerned, a lot of them would play significant orders in one go and we obviously deliver those orders virtually during the space of one quarter or maybe over two quarters. And when that happens, there were some that has a major impact on the profitability of the specific segment.

And it makes it very difficult for us to predict exactly when the banks will be expanding their point of sale networks or when they will be replacing some of the -- all the antiquated networks is not really something that we have any control over. Of course, in today South Africa the big, the turning factor for our hardware and software sales division is always when our African customers decide that they want to place orders and again we're looking specifically at the large implementations that we haven't gone in Iraq. Those are also not very predictable, but when they happen they are all significant events in their own right. And I think also just to compare apples with apples, you have to take into account that the comparative number for last year included quite a significant loss at Net1 Austria, which was prior to our restructuring of that specific business and large scale reduction of the overhead cost base in that business.

And so I think the drag that that had on the margins for this segment has been largely removed. And we expect this segment to be at least profitable I hope and show a decent low single digit margin for the rest of the year.

All right, great. And then the final question. Just on that little acquisition that you made, what are your revenue expectations this year for those to mind?

Well, it's early days. We've got two of them. The one is, a bit more difficult probably in terms of the life insurance business that we have. Obviously, that's a business that will take a few quarters to ramp up and is a function of developing the appropriate product fits and getting those signed off by all the regulatory authorities. So I don't expect the SmartLife business to be in any significant way a large contributor. There will be some minor revenues arriving from that business but the points that we paid for it is effectively the price of a life insurance license in South Africa without any business attached to it. So that's the SmartLife business. As far as EASUN business is concerned, it is obviously very early days for us. We've only really had this business for the last two or three weeks and we are very busy integrating them into the EasyPay platforms.

And it will really depend on what the final mix of products in that business ends up being. This is a business that sells primarily prepaid electricity and prepaid airtime, both of those have fairly significantly different values and commission structures attached to them. So it's very difficult for me right now to give you an accurate indication of where we will end up for the next couple of quarters. But I think by the end of December once the products are integrated into our platforms and we have gone through a few months of solid sales on a completed calendar month basis, we will be able to give you some proper guidance during our next earning calls, specifically as it relates to EASUN.

Great, thank you.

Daniel Baldini, Oberon Asset Management.

I have a couple of questions, if you don't mind. My first is, when I read through your 10-K and listened to the calls and so forth, I'm really surprised by the breadth of activities that you've got going on. And now I hear that you've gotten into the life insurance business. And I just have a general question and I wonder wouldn't you benefit from greater focus on a couple of businesses that really mean a great deal to you? And related to that, when I read the 10-K, I see that last year you spent -- no, it says you spent $5.7 million on R&D, which is about 2% of revenue. And when I think about things like your mobile virtual card and your claims adjudication software and your cryptography and so on, it would seem that in order to succeed in all of these technology businesses, you would have to spend a lot more on R&D. So those are my related questions.

Thanks very much. It's Serge here. Those two questions of yours are actually extremely good questions. And the thing that I think one is to understand is that South Africa is not a very, very large country. Not from a geographical point of view, but from a financial point of view. So when we target business, we target ready at the end of the day customers and we try to offer certain products to these customers. And what we try to do is to try to make sure that whatever the customer requires we can directly or indirectly provide it to that particular customer. So when we kick off, and for example we work with pension and welfare and we have to provide, for lack of a bit of word, cash distribution in about 11,000 payphones throughout the country to the extent of about ZAR2 billion on a monthly basis.

We look at this and we say that model is unlikely to be sustainable, the only thing we do with that infrastructure is basically to provide a cash outlet. It simply doesn't make any sense and we've seen it with SASSA trying, for example, ensuring that in fact the cost of the distribution becomes lower and lower. But the only way you can combat that is to make sure that you use that infrastructure to do other things.

And other things means two things. One, targeting the same customer base, but offering them other products or two, targeting other customers that are not pensioners and certainly that is the methodology or our approach simply to ensure that going forward the pressure put on to us by government to reduce the cost of providing a distribution service for welfare is compensated greatly by having the ability to use the same infrastructure in other markets for other people and to provide different services.

Now as (inaudible) said, we've done this as we have to, for example, own the insurance company. We could simply do a deal with one or a number of the insurance companies. But again, in South Africa, we have a very much different model whereby the economy of doing such a deal are not only simplistic. So, what we tend to do is that we tend to go out and do it ourselves. One, to prove that in fact there is huge value in this particular business, that's the big thing. Two, because we have no additional cost in actually doing it in terms of distribution and collection, which is very, very important. Once that is actually going, we will then review if that's the business that we want to remain in, or if in fact to choose a business that we can sell off to somebody they should have been in that business once we ever establish that the economics for us are going to be the best possible for the Company.

So that's the model we've always employed. If you look at the medical aid or this Medikredit system, one says well, why are you in that business. Well, the financial transactions, they are protected by biometric technology. Therefore it makes sense for those transactions to be integrated. Once again, 3.5 million customers, all of them are likely to be on national help in South Africa. We have the customers, we have that infrastructure, we might as well distribute medicine if it is something that government wants to do. So you got to direct to build in your mind a bigger puzzle or a bigger picture that is going to show Net1 as being the provider of all possible services that that group of individuals or people are wishing to have, others are say directly or indirectly. So I hope that answers the first question reasonably well. And the second part of your question is technology.

Now, you are quite right. We are basically a technology company, but we're a different type of technology company whereby we don't really built technology to sell it, we normally build technology to use it in our own businesses or to change the way existing businesses are currently running by utilizing new technological innovations.

So you're 100% right that how much are we spending as a technology company in R&D, is actually very small compared to a lot of other companies. But we started this Company in 1989. It's been really a developing technology for more than 20 years.

And at the moment, we've reached a stage in our view whereby our technologies have such a nature is so robust where this is now the time to focus on distributing and utilizing this technology rather than to continuously try to improve it or to add more features to it. A lot of our stuff in our view is still many, many years ahead of what's out on the market.

So we would like to start getting, for lack of a better word, a real return on this. And to really limit our R&D on the service stuff that today people are focusing on. For example, our mobile, which is something that we are doing in VCC Virtual Card, which is something that's a big, big play on the worldwide basis.

So on those we are spending a lot of money. But on a natural UETS or our MediKredit engine in terms of being able to do claim validation and adjudication online real time. We have this technology very, very well mature in the industrial strength. And we would like to get a good return before we are start investing further.

Okay. Great, thanks. Can I ask you a related question? If I look in your 2010, 10-K in the risks sections there is a chapter entitled risks relating to intellectual property and there is comments in there about patents for our FDS will expire at various States in 2011.

Our current license agreement with VISA imposes restrictions on our ability to license rights, blah, blah, blah. Our license agreement with VISA substantially impacts our ability to bend our patents and so on. When I look in the most recent 10-K, this section isn't there. So I'm curious to know how your view changed on these risks relating to intellectual property over the past year.

Again, it's very -- it's another very, very good question. I think, you are the first person that's actually noticed the change, I think, between the two. And there is no doubt that because our technology dates back many, many, many years or at least our patents that make many, many, many years. We added at one stage an agreement with VISA to do certain things that can be deliver never actually transpired. And over the years, there is no doubt that our initial technology, which was the 1989, 1990, 1991 technology adds certain restrictions that VISA could have imposed on us.

All of that is dating on long time ago intendedly, it never impacted where we wanted to do business or how we wanted to do business. But it's something that through the years entering into many different agreements, as I said, 15, 20 years ago we have to actually make our shareholders aware that there may have been some restrictions. And we would weather that on the cautious side rather than just simply saying, there are no restrictions at all.

Today, those restrictions are gone, they don't exist. It does not mean, by the way, that just because a patent might have expired, which is correcting in some particular countries, and with some of our patents that today people could go ahead and utilize some of their technology to redevelop our systems.

One thing we've learned is that to redevelop the toughest systems that we have in Iraq and Ghana, in number of countries in the CIS Republic or even in South Africa, it's not a matter of picking up the patent, which I wrote myself, but it's 27 pages and it's rather quick to be able to read it. It doesn't mean you are going to have a system that can compete with what we have got and we will have the track record of what we've managed to establish over the years.

So although that we believe that going forward, we still continue to patent our new inventions like such as BCC for example, we do that to be quite on the law to protect ourselves against someone else taking what we've done and trying to say that some what we infringe on their patents rather than for us to actually attack them because we believe that they might infringe on ours.

So at the end of the day, our patents in our view recognizes and forces us to evaluate what's available in the market to make sure that in fact what we've done is fresh, it's new, and it's something that does not exist.

So already that allows us to get some money back from the lawyers by giving us a bit of the clue in terms of how powerful what we've just got it really is.

But more importantly it also validates the fact that no one else has got something like that. Therefore we can go ahead and actually develop our business plans and our business model along this technology without fear of being sued by a third party because of patent infringement itself. So that's the reason why we do it that particular way.

Okay, okay. Now, if you permit me one final question.

Dan, it's Dhruv. Can we just give anybody else in queue and you are welcome hop back in line?

Sure, sure. Yes, all right.

Leonard Deprospo, Janney.

The $1.60 guidance, could you little bit extrapolate that? You'd only really need to generate about 5% fundamental EPS growth on average for the rest of the year or afterwards be strong. And, that you have been conservative that new investment in the business, and I am just trying to get a answer on that a little bit?

Len, can you actually speak up because it's very difficult to hear you?

Can you hear me now?

Yes, now it's better.

Okay, sorry. So, $1.60 guidance seems conservative given that, if strong first quarter with EPS growth and the $1.60 would imply 5% EPS growth for the rest of the year. So, I was just wondering if that you are being conservative or that reflects -- if that's in the business or just how you're just trying to run the arms around that a little bit?

Sure. And obviously we carefully consider the guidance that we put out and there is no doubt that we have tried to be on the side of being conservative rather than being overly optimistic.

But I think there's three quarters left of the year and having to kind of give you our views of where we are going, there are many variables that we have to take into account. I think one of them obviously revolves around the increase in the tax rate as I've mentioned before. The first quarter tax rate I think was quite favorable for us and delivered quite a nice ticket to the fundamental EPS.

We have a couple of investments that we still like to make through fiscal 2012. We've got new projects that we have to fund and obviously we'll incur some startup losses for those specifically in the US as it relates to BCC and in Mexico as we scale up to launch the Banamex project.

So I think that with some of these uncertainties being taken into account and obviously the hardware and software sales, which we spoke about earlier, they're all pretty lumpy and very difficult to give any quantum to over a short period of nine months.

It does make it very difficult for us to just extrapolate the EPS as it was in Q1 over the next four quarters. And so the number that we give you we really believe is an achievable number and is something that we can standby at this point in time.

Okay, thanks. And then just my other question was around the viral transactions process, that showed pretty significant growth, 24% year over year after recent trends and were much lower than that. Can you just briefly walk through what is driving that?

Sure. We've got in terms of the transaction volumes that we processed, there are obviously a couple of contributors towards this specific metric as we provided. And the bulk of the transactions that we processed in the South African transaction processing space, we got to split those between what we do from the pension and welfare point of view, obviously also what we do towards EasyPay platform.

But from a merchant specific point of view, is that what you are referring to? We've seen a significant number of our customer base in the pension and welfare space move towards the merchant infrastructure for payment simply because it is very convenient payment methodology for them to use, it's the type of business that started out very slowly and people need to adopt the really the other way that they get paid and then actually embrace the fact that they no longer have to go on a specific day to a specific place.

And once they realize that they can go on the first day of the month to receive their social grants instead of having to wait until the middle of the month to go a specific point, it becomes kind of like a viral adoption of this alternative payment they said that they have available to them.

They also obviously have the whole month to receive their grants as opposed to a specific day or often just a few, the first few days of the month where our mobile paypoints are available in the areas.

And I think what we've see now is that this adoption rate of pensioners and beneficiaries who understand the benefit that this brings to them has increased almost exponentially and that's why you have seen that a lot of that pensioners have decided to go electronic, towards the electronic point of sale, route of receiving the grants and spending their grants.

And it's basically up 50% I think from 45% in the last quarter. So there is a quite a significant growth rate.

How far that will go is obviously difficult for us to predict. We have internal bates as we've had for the last four or five years, how far this adoption rate will go and there is no doubt that some people will always prefer to receive their grants in a traditional old fashioned way that they used to.

But I think this is an aspect of the service that we deliver that has exceeded even our expectations and is something that we believe could -- probably we should target around 60% to 65% of the total distribution base over the next year or so in terms of delivering those grants.

Obviously, again it's a function of what the outcome of any tender process could be.

Great, thanks.

Dillon, do we have any more questions?

Daniel Baldini, Oberon Asset Management.

Okay, it would seem to me that this KSNET business in Korea is really crucial to your success and there is a comment in the 10-Q that you just filed about KSNET, which goes like you commenced a number of strategic initiatives to maintain your market share and you embarked on a number of medium term initiatives to be funded from cash reserves. We do not expect to use funds generated from operations, other operations, although certain repayments of the KSNET acquisition loan facility may be repaid from head office.

So could you maybe describe briefly the competitive situation in Korea and what these initiatives are that you are undertaking to defend your market share and why they might preclude you from being able to services the KSNET debt from internally generated cash flow?

It's Serge here again, I think, I will give you a piece of the answer and then Herman will give the financial piece. Number one, I think when you say KSNET is absolutely mandatory or necessary for the survival of our business, I think, that is not entirely correct.

KSNET for us is, we didn't have it a year ago and the business was doing very, very well and we would have continued to do very, very well. The purchase of KSNET was very much a decision made in order for us to diversify both from a risk point of view on the exchange rates because of the rand, also from the country political risk.

So we believe that in fact, acquiring pretty sizable business or at least a sizable business like KSNET in Korea which is a stable, a well-run country, which has got in our view a very, very good GDP. And also opens up for us the Far-East in terms of looking at other opportunities.

So really the decision to buy KSNET was based on those particular principles. Certainly at the end of the day, for example SASSA is probably far more important to us than KSNET is or candidly will ever be.

So from that point of view, I just want to make it clear that KSNET is certainly not something that we deem to be 100% the panacea that somehow is going to make, either the Company grow exponentially or if we decided not to keep KSNET in the long-term that somehow, that would have necessary a negative impact on us.

So that's the first point. However, your second question which to me is again a very good question is what's happening in Korea in terms of the marketplace. Now I don't know how much you know about Korea, but the banks are structured very differently to anywhere else in the world. The way they compete there seems to be a lot of stuff that appears to be competitive when in fact it's pretty quite fixed.

The government seems to interfere in a number of decisions which normally they do not do in many other countries, so it's a strange environment and the way they market their services through what they call an Asian network is also very, very interesting because the Asians tend to get paid upfront for something they are going to deliver over the next two years, three years, four years or five years, which is fantastic. It certainly not a model that I would use in South Africa because they actually give you the money back if they actually don't deliver what they are meant to deliver.

I am not too sure that there is any other country anywhere else that would be prepared to take a chance, that is going to give me the money back, if it doesn't do what they meant to do.

They is also the funding of terminals and all of that is always being really well known, the way that it is works in Korea. I think KSNET got a probably the other largest, if not largest, the second largest switch in Korea. They probably are the most profitable switch in Korea.

And I think they've got the right pedigree, the right backgrounds, it is very important in Korea, the right knowledge and I think we have the right management that just got a huge amount of credibility on the ground that will help us to continue to keep that market share.

The question was always, what are we going to do with the 200,000 merchants that we have today in Korea and this is where the value-added services, this is where the synergistic opportunity arises, because if we cannot somehow find a way of exploiting the fact that they have 250,000 odd merchants that they are using our switching technology and switching services.

Then candidly, we already would have failed in top of saying we can actually buy a company not only because what it would generate in its own like. But, on what else we can actually do with it and that is to us where the real opportunity was in Korea.

Furthermore, the Koreans are very well-respected around their region in terms of technology. Also you know that they are quite big in the cellular phone industry and we also saw that there is an opportunity for obviously NVC as well as perhaps starting to export our own software and products from Korea to the rest of the world rather than from South Africa to the rest of world. Simply from a credibility point of view and size point of view, we felt that it was quite a good strategic move.

So these are some of the reasons about why we did the particular deal and why we believe that it could be a very good deal for us.

But certainly not, what I would call puts us or puts the Company on the turning point, it simply is another product in the lifeline of Net1, but I'll let Herman give you a little bit more detail on the financials.

Sure, just on the use of cash and the way that we structured this acquisition, which is all financed through a ring-fenced debt facility, there are couple of considerations that we take into account all the time obviously in terms of where we service the debts from. Some of those are obviously tax related considerations. In Korea itself, they are specific dividend taxes that do apply when dividends are taken from the operating company into the holding company. So that's something that we have to consider.

There are specific cash flow requirements within the KSNET environment and those are quite significant from a CapEx point of view from a special project point of view where as Serge mentioned from time to time we have large projects where we signup blocks of agents or blocks of merchants that requires a significant investment in CapEx at that point in time as well as an upfront payment.

And so without having to place undue pressure on the cash flows of that business that it needs to fund its own OpEx and CapEx, we take that into account as well when we consider on a semi-annual basis how we want to repay the loans and on a quarterly basis how we want to repay the interest.

Overtime, we obviously believe that we will push both the interest and the debt repayment themselves down into the business to get the maximum optimized effect for it.

Okay. Great, many thanks.

Pleasure.

Ladies and gentlemen as there are no further questions, I would like to close the call. On behalf of Net1, that concludes this conference. Thank you very much for joining us. You may now disconnect your lines.