Lesaka Technologies Inc (LSAK) 2012 Q2 法說會逐字稿

Ladies and gentlemen, good day and welcome to the Net1 second-quarter 2012 review conference call. 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. At this time I would like to hand the conference over to Dhruv Chopra, Vice President of Investor Relations. Please go ahead, sir.

Thank you, Harry. Good morning and good afternoon to our investors around the world. Thank you for joining us on our second-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 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 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 we have provided a reconciliation of these non-GAAP measures to the most directly comparable GAAP measures. We will discuss our results in South African rand, which is a non-GAAP measure. We analyze our results of operations in our 10-Q and 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 US dollar and the South African rand. With that let me turn the call over to Serge.

Thank you, Dhruv. Good morning to all our shareholders. We like to begin with an update of the key trends in the business before I will hand over to Herman, who will discuss our financial performance in more detail.

I'm very pleased with the momentum in our second-quarter 2012 results. We reported revenues of $92 million, which was a year-over-year increase of 3% in US dollars and 22% in constant currency. Fundamental EPS for the second quarter 2012 was $0.39, up 2% in dollars and 20% in constant currency.

We posted modest growth in our pension and welfare business during the second quarter of 2012, driven by double-digit increase in our rural acquiring business and operational efficiencies on the cost side.

As of December 31, 2011, we had $81 million in cash on the balance sheet, bringing our net debt position to $25 million. Operating cash flow during the quarter was negative $6 million, which is consistent with the seasonality of our cash flows given usually tax payments made in the second quarter. This quarter I will deviate slightly from our regular communication strategy and focus my discussion on our largest businesses, key developments and overall corporate strategy.

As a reminder, our core established businesses, which include CPS, KSNET and EasyPay, together in quarter two 2012 accounted for approximately 82% of our revenue as well as the majority of our profits today. These larger and more mature businesses either are or have the potential to generate at least double-digit growth consistently over time.

The second subgroup is our growth businesses, which are smaller but in our view have the potential to grow at a rate materially faster than our established businesses over time. This group, which is also strategic in nature, includes Net1 UEPS, MediKredit and FIHRST, and collectively account for approximately 7% of our revenue.

The final subgroup is classified as software 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.

Let me now move on to two of the more significant events in our company's history. First and foremost, we are delighted to have been awarded a contract processor to provide the distribution of social grants to approximately 9.6 million unique beneficiaries across all nine provinces in South Africa. We completed our service-level agreements earlier this week and are now actively prepaying to commence executing against those agreements. The distribution of grant on such a scale is indeed a brilliant task but one that Net1 is well-positioned to deliver on.

The contract will take effect on April 1, 2012, and we have two main deliverables [for] to medium term. The first is that by the end of March we will have to have issued MasterCard branded debit cards to all the beneficiaries we do not currently serve as a bridge, until we are able to enroll all beneficiaries with our combination EMV UEPS smart card, including the capturing of biometric images and performing a one-to-many biometric search to eliminate duplicate registrations.

By September or October of this year, we must be fully prepared to distribute grants to all beneficiaries across all towns, cities and villages, and across all distribution channels on our EMV UEPS cards.

To service this important constituency, we have to build a comprehensive state-of-the-art distribution platform. While we have a number of the key ingredients already in place with our 10,000 pay points in the rural areas, 50,000 EasyPay terminals and a further 5,000 rural point-of-sale terminals, we have to tie all these together on a national basis, including ubiquitous biometric verification and service delivery.

To achieve these objectives, we anticipate to have to spend $45 to $50 million in capital expenditures on cards, terminals, biometric readers, backend servers, backend processing systems, voice biometric technology, call center, cash dispensers, vehicles and many other technological and logistical products. I will let Herman discuss the financial implications in more detail.

But on a normalized basis we expect our pension and welfare business to be accretive in absolute terms to our current profitability from our contract.

The second landmark event was our broad-based black economic empowerment deal with Mosomo Holdings, whose CEO, Brian Mosehla, has now joined our board. In our view we have no doubt this transaction will lead to substantial improvement in our BEE rating, enhance the long-term sustainability of our South African operation, and drive incremental business opportunities both locally and in other developing economies, specifically in Africa.

Some of you may recall from our listing that our mission is to provide an alternative payment system to the majority of citizens within a territory, specifically those that are normally excluded from the economy and those that have had little or no access to competitive financial and/or retail products.

To this end, we have spent many years developing our technological platform in order to service all citizens, including those which reside in deeply rural, semi-rural or urban areas, regardless of their financial status, the absence, reliability of performance or infrastructures such as electricity, communication, financial services, retail outlets or any other delivery channel. Our solutions comprise our very latest technological breakthroughs in terms of biometric identification, using both voice and fingerprint; our new version 16 EMV-compliant UEPS suite of transactional products, as well as our new enhanced neural network, one-to-many array processor identification system.

Our solutions can now provide interoperability across our and all traditional payment systems, thus ensuring ubiquity of transacting for all without the need for any hardware or software changes to be made by any of the existing or any of the new participants. The combination of these technologies ensures that we can provide the tools that are required to enhance service delivery, protect the [sale], disabled and the most vulnerable and eliminate avenues for fraud in the abuse of our customers and consumers.

It is often believed that our systems, platform and technologies are designed to only service social welfare recipients. Nothing can be further from the truth. Our infrastructure, which will undoubtedly reach economies of scale, because of the SASSA initiative, was designed to service not only those in need but also those that have been excluded from participating in economic activities due to the existing rules as set by financial service providers. It is our belief that our solutions will transform these markets and their rules as the risk currently intrinsic to these products will be considerably reduced or eliminated if our technology is utilized.

Net1 is now positioned in such a way that it can continue to provide SASSA for the most efficient and effective payment system on a national basis, but is also poised to utilize the same systems and platforms to service all other citizens that are all in desperate need for affordable, safe and cost-effective products and services. We are able to realize the above strategic plan plus keeping the highest level of social responsibility, the preservation in fueling the rural economies, and most importantly, to ensure financial inclusion for all South African citizens.

While we focus on these challenging projects, we will also seek to capitalize on our international opportunities in Korea, new international UEPS deployments, our mobile virtual card, and of course our XeoHealth initiatives.

Let me now briefly address some of our other material businesses and developments. For KSNET, one of the leading providers of card processing in Korea, for the calendar year 2011 the business generated a 14% adjusted revenue growth and 13% operating income growth, which was in line with our expectation. We continued a special promotions for sales agents to further penetrate the small and medium-sized merchant market, and we expect to see the benefits of those investments over the remainder of fiscal 2012, and of course beyond.

For EasyPay, during the second quarter 2012, we continued to refocus the business toward higher-margin value-added services and away from low-margin transaction processing, such as hosting for certain financial institutions that generate a roughly ZAR0.01 per transaction.

Additionally, in the second quarter, one of the EasyPay's largest (inaudible) customers also decided to move its basic EFT switching business in-house. But we have retained all of the value added services we provide to that customer, which is still the majority of our volume.

As a result, we expect some but largely immaterial impact on the operating income of the business, but an improvement in its margins over time.

In quarter two, we also closed our strategic acquisition of the South African prepaid electricity and airtime businesses of Eason & Son, which further enhances EasyPay's portfolio and scale of value added services.

Part of EasyPay's strategic plan is to have a seamless multichannel network ranging from physical domicile location, Web, kiosk and mobile. And we are making very solid progress in this regard, and our EP Kiosk initiative has now been integrated into EasyPay. We have now deployed upwards of 150 of our kiosks in various environments and as part of our broader South African strategy, there is a real demand and opportunity to increase this footprint dramatically.

To reiterate, what I said last quarter, value added services volume at EasyPay is more than double that of traditional card switching and is the real competitive differentiator in this specific business.

NUETS have developed a new limited investment software as a service business model and to reduce up front capital investment of potential developing country customers, while accelerating time-to-market.

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

XeoHealth, a healthcare claims processing subsidiary in the US signed its third deal in the US within a very short space of time as a subcontractor to Cognosante to provide recovery audit contractor services to the state of Missouri for Medical, Medicaid, very similar to the one announced last quarter in North Africa.

Our claims processing contract or CPS in Pennsylvania began generating revenue, recurring revenue (inaudible) and we expect the other two contracts to begin contributing over the last -- over the next two quarters.

Lastly, for mobile virtual card we have delivered a substantial portion of our hardware and software to Banamex in Mexico and are currently in testing phase. We expect large deployment within the next three months.

Our MVC deployment in the US with metro PCS continues and continues to grow although still off a very relatively small base. However, the advisers we appointed last quarter are actively drafting a more comprehensive strategic plan to expand the awareness and adoption of our technology in the United States.

Given the rapid increase in traditional credit and debit cards in South Africa, we also recently did a soft launch for MVC locally and expect a more meaningful rollout during 2012.

To conclude, I believe that the new SASSA award will, one once implemented, provide greater visibility, profitability and therefore confidence to our existing and new shareholders, and in turn, reflect a 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.

I realize we are long overdue a visit to meet with our shareholders, and we expect to honor that obligation around mid May, by which point we should have delivered on the very aggressive beneficiary enrollment deadline later in our implement with SASSA.

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

Thank you, Serge. I will discuss the key results and trends of our significant operating segments for the second quarter of 2012 compared to the second quarter of 2011.

As Serge mentioned I will also discuss the financial implications of our new SASSA contract as well as explain the recent change in South African tax law. 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 Q2 of 2012, our average rand/dollar exchange rate was 8.18 compared to 6.94 a year ago, and negatively impacted our US dollar-based results by approximately 18%. The comparability of our financial results for Q2 2012 was impacted by the inclusion of KSNET for a full quarter and our Eason acquisition.

On a consolidated basis, for the second quarter of 2012 we reported revenue of $92 million, an increase of 22% in constant currency, and 3% in US dollars. Fundamental EPS year over year was flat at $0.39. However, in constant currency it increased 20%.

We measure the group's profit ability by looking at operating income and margin by segment. We recorded a tax benefit during Q2 of 2012 as a result of the change in South African tax law. The change has been expected for a number of years and primarily impacts the way that we report our income taxes.

On December 20, 2011, there was a change in South African tax law to impose a 10% dividend withholding tax and the tax dividends withheld by a company on distributions to its shareholders to replace the 10% STC relief, which was a tax levied directly on the company on dividend distributions. As a result the company has recorded a net deferred taxation benefit of approximately $20 million in the second quarter.

The payment of dividend tax is effective for all distributions made after April 1, 2012. Any distributions made prior to March 31 will still be subject to STC.

Currently we intend to permanently reinvest our undistributed South African earnings as of December 31, 2011 in South Africa. However, should there be any change in our intention to externalize any of these undistributed earnings, we will be required to record a taxation charge related to those actions. Therefore, our tax rate might fluctuate depending on our intention recording undistributed South African earnings and the timing of any such payment.

We would expect our effective rate going forward to be between 36% and 41%. However, as discussed there could be fluctuations in this rate.

Within our segments, South African transaction-based activities posted revenue of $46 million during Q2 2012, which is 17% higher in local currency, and down 1% in dollars, driven by modest growth in pension and welfare, double-digit gains in merchant acquiring, and improving performance at MediKredit, as well as the inclusion of Eason.

In constant currency, segment operating income excluding amortization increased by 3% from Q2 2011 due to modest revenue growth of operating efficiencies but offset by the loss of the switching business of a large EasyPay customer. Now operating margin declined 500 basis points to 38%, primarily due to the inclusion of Eason's prepaid airtime business, which has by its nature a high volume and low margin.

Our international transaction-based activities posted revenue of $29 million during Q2 2012, and includes KSNET for a full quarter. Revenue grew by 95% in constant currency and 66% in US dollars.

Segment operating income includes additional start-up expenditure related to the launch of our mobile virtual card and XeoHealth initiatives in the United States and Mexico. For Q2 2012, KSNET generated revenue of $28 million and an EBITDA margin of 27%.

For our financial services segment, revenue in Q2 2012 increased 39% year over year in constant currency to $2 million, principally as a result of an increase in the number of UEPS loans provided.

As highlighted last quarter, segment operating margin was expected to be under pressure. And for Q2 2012 it decreased to 53% from 62% in Q2 2011. The change is due to start-up expenditures at SmartLife and the change in the insurance provider for UEPS-based loans, which resulted in an outlying period of three months.

We are now self insuring these loans through SmartLife and, therefore, we believe that this will reduce our costs to insure the loans going forward. Our Q2 2012 interest expense decreased by 31% in US dollars as our Q2 2011 expense included the majority of the amortized facility fee of $1.7 million.

I will now provide some additional detail of the anticipated financial implications of our new SASSA contract.

Our new contract becomes effective on April 1, under which we will be required to enroll approximately 15 million grant recipients and issue approximately 9.6 million payment cards initially. We will be paid ZAR16.44 inclusive of that the beneficiary paid, which translates to approximately ZAR158 million revenue per month net of that, or approximately a 35% increase over our current contract.

Once we are fully phased in, we expect at the very least to maintain our operating income on an absolute basis which we generate from our current contract. We currently expect to be fully phased in by the second quarter of fiscal 2013.

We anticipate capital expenditure of $45 million to $50 million during the next 12 months. Over half of these investments relate to infrastructure, such as payment vehicles and equipment and branch network, while the majority of the remaining investments relate to payment cards and terminals. The bulk of the investments will take place in Q4 2012 and Q1 2013.

Now operating expenses will increase due to higher headcount. As we employ additional people we will be responsible for initial enrollment and issuance of [costs] as well as ongoing payments, as well as higher variable expenses related directly to the distribution of grants.

As of December 31, 2011, we had $81 million of cash and equivalents on our balance sheet.

Q2 2012 is seasonally our lowest cash flow generation quarter, given, amongst other things, the timing of South African tax payments. During Q2 2012 cash flow used in operations was $6 million and capital expenditures were $5.1 million.

The change in our cash position from September 15, 2011 was due to a $7 million scheduled principal debt repayment, $5 million for the acquisition of Eason, and $3 million related to fluctuations in exchange rates, offset by a net $5 million settlement received from the former shareholders of KSNET.

Our fully diluted weighted share count for Q2 2012 was 45 million shares. We have not yet granted the option under our BEE deal. However, assuming that the option is exercised in full we would receive proceeds of $80 million and issue 9 million shares. Therefore, our diluted share count will be approximately 54 million shares assuming we use none of these proceeds to buy back our stock.

In the quarter we granted option under US GAAP. We will be required to book a non-cash stock-based award charge. Our priorities for uses of cash remain capital expenditures, strategic acquisitions, buybacks and debt repayments.

To conclude on guidance, the next three quarters are difficult for us to predict at this time given the timing and magnitude of investments required in any of these quarters. However, we anticipate still being profitable on a fundamental earnings basis for the second half of fiscal 2012.

With that we will gladly take your questions.

(Operator Instructions). Dave Koning, Baird.

Hey, guys, nice job on the new contract. My first question just revolves around the last five years or so there's been so much focus on this contract that I know it's probably been quite distracting internally. Does this really free up now the next five years your ability to go out and have many more conversations with other countries of other institutions? And are you already seeing progress on that front?

Actually your question is a very, very good one, a very valid one. I think very few people -- and obviously it's understandable, do not understand the amount of management bandwidth that we have spent over the last many, many, many years to arrive at this junction, where we are now being appointed as the -- basically the national welfare payment instrument for SASSA.

And you are quite correct in stating that I would think that over the next six months or so, the bandwidth that we have spent in focusing on SASSA will now be moved down to a next level of management, where operationally, people are start getting involved with this particular project and really make it work and try to optimize our investment and try to rebuild or build our margins, which obviously is not going to be taking as much of our time as it used to be in the past, where we were really trying to work out what we should do to convince SASSA that in fact we were the right -- we were going to be the right company to facilitate these payments across all of the country.

So there is absolutely no doubt that our focus, apart from obviously delivering on SASSA, is now going to be on focusing on the businesses that need our attention, could do with our attention, and certainly the businesses that we believe can grow the company at a much, much faster rate.

During my little discussion or speech, I did mention VCC, which personally I still believe is something that can grow at a substantial rate. I think there's a demand for that worldwide and currently we haven't seen anything that remotely looks as interesting, as secure or simple to use as ours. So that is something that we certainly want to spend a lot of time on.

I think XeoHealth is something that we wanted to experiment with in the US as a very difficult market. And we have been very successful very quickly by signing three contracts. And that is something that is showing huge amount of potential, not only in US but elsewhere.

So to conclude, there's absolutely no doubt that during the next two to three years we intend to ramp up our other businesses and opportunities in South Africa and outside of South Africa at a much greater pace than what we have done in the past.

Great, thank you. And then just one follow-up, you mentioned how this will likely be at least stable under the new contract. But separately I guess from the core contract with the government you're going to have 3 times as many cardholders. Would you expect just all the services around having those extra cardholders to generate kind of meaningful incremental revenue? And I guess kind of a corollary to that question is just the next two years obviously there's a lot of cost going into ramping the contract. Do you have kind of a goal out there for fiscal 2014? I'm just throwing out a number, but maybe like $2.00 of EPS by 2014 if some of the new revenue streams kick in; and just kind of looking at kind of long-term profitability goals.

I'm not going to answer the financial question because that's Serge's department, but if you -- perhaps I haven't been that clear in my and it's very difficult to put it in writing. But I think I read clearly in your question that you've obviously understood the power of having to deploy a payment infrastructure across all of the nine provinces of South Africa and at the same time to have the power of living indirectly because after all are beneficiaries of SASSA's customers but they also to some extent become ours. And the (inaudible) of having 10 million customers, which is more or less 20% of South Africa's population, must give us a massive opportunity, not necessarily to try to sell products directly to people that are poor, but certainly to utilize the infrastructure that you need to pay rands to those beneficiaries in order to lock up many other customers that candidly would be able to use the same infrastructure, and for us to target those customers with a range of other products as well.

So they will be, without a shadow of a doubt -- on an equal playing field basis, there is no reason why our 10 million pensioners should not be able to buy products from wherever they want, including us. But more importantly, I think the real money in my view could come out of other customers that are not necessarily beneficiaries, that are going to want to use the same functionality that we are providing to beneficiaries simply because it is safer, faster and better than anything else that's in the market today. And I think that's really where the game plan is going to happen.

I think in a way reading between the lines and reading your question, I think you've probably read it correctly in terms of what could be a potential upside for us in the South African market.

Sorry, gentlemen, we have a question you asked regarding our long-term profitability goals. Yes, obviously, we intend to increase our profitability in the long term; it goes without saying. And the fact that we will have this expanded infrastructure, once established, obviously will make it a lot easier for us to do so.

I think a key take away point is that the infrastructure that we are rolling out, now that we have a EMV stroke UEPS card obviously implies that that infrastructure is accessible not only by her own cards but by other EMV cards, as well, which obviously creates a set of opportunities for us to derive additional benefits from it.

And if we look forward to 2014, obviously it's difficult for us to put a goal up there like $2.00 a share, whatever the case may be. There are simply too many other variables, including the exercise of the options or not. That obviously would have an impact on the shakeout in the EPS calc in itself.

But our long-term goal -- I think our medium-term goal is to simply maintain the quantum or the absolute quantum of the operating profit that we've generated in the past from this contract. And we obviously have a plan to convert the national infrastructure that we will build and all of the facilities that will be at our disposal turning to a higher earnings power by 2014.

Great, thank you.

Eric Almeraz, Apis Capital.

Hi, guys. A couple questions, just the first question, as you start to make some of these expenditures over the next couple of quarters, will you be able to show us the underlying performance of the business? Or is that going to be difficult to separate out so that we can just see how the underlying performance is still tracking?

We certainly intend to have a look at our segmental disclosure going forward in terms of what the new contract means to us, and obviously how the decision makers in the business look at it. And there is no doubt that we will pay very close attention to this project and how it translates initially and, obviously, into the capital expenditures and sort of big volume of start up costs that we expect. So we believe that we will probably be in a position to give you a fairly good indication on a quarter by quarter basis as to how this business will track and what our progress is specifically in relation to the initial period where we anticipate the significant CapEx and the significant startup costs.

You guys talked about your average price per beneficiary per month of I think around 16.5 and including the value of around 14.5 after that.

I think the rough math on the existing business today is something in the mid-to high 20's, so the price has fallen quite a bit. Do you think that the existing business, the existing beneficiaries that you serve -- will those continue to be profitable under the new contract? Or are you going to have to see something more like a loss there in order to capture those new urban beneficiaries that may be more profitable?

Yes, I think the way to think of this is that our current beneficiary base of 3.2 million sort of cardholders, we obviously will continue to serve those as we have over the last eight or 10 years, in most provinces. What we need to understand, though, is that we are reissuing cards, new cards, to all 9.6 million beneficiaries. So we will have to incur the cost of issuing new cards even to our existing cardholders. And while those provinces should be on a stand-alone basis more profitable for us than the new ones that we have to service, we still have to reinvest quite a substantial amount of money in upgrading our infrastructure in those provinces where we were before, simply because we have run that infrastructure for the last 8 to 10 years in some cases. We've obviously been anticipating an outcome to this tender award for the last three years.

And we've been very careful in the amount of investment that we have made. Now that we know what it is, we obviously plan to make sure that we modernize all of our existing points in addition to modernizing or incorporating the new areas into what we do.

So -- and I think the other thing that one has to keep in mind when you try to work out the relevant economics of this contract, service delivery in the rural area, which is predominantly where we are today, is from an operational expense point of view traditionally a lot more expensive than it would be for us in an urban area. So as we roll out the urban areas, there is an initial start-up cost that we have to incur, but traditionally the distances that we have to cover and the volumes that we serve are much greater at a specific point.

So there are pros and cons to the new areas that we will get. There are pros and cons to the existing areas that we have. But obviously we believe that when we take a blended view of the rural and the urban areas, we should be able to at least maintain the quantum of our operating profits.

What do you think the relative cost is per beneficiary? Is it like half the cost in the urban versus the rural or order of magnitude different from that?

We at this time at least cannot give that kind of granularity. But if you have additional questions also if you don't mind just jumping into queue so we can give everyone else a chance.

Got it. Thank you.

Daniel Baldini, Oberon Asset Management.

Good morning. Thanks for taking my call. First off, congratulations on this contract. It's wonderful news.

I have two questions related to the contract. It mentions in the 10-Q that a couple of the losers are disputing the award. And I'm wondering if you could describe what the procedure is for, I don't know, adjudicating these disputes.

And then the second is the term of the contract is five years. And you are investing I don't know $50 million of capital to fulfill the obligations under the contract. And do you anticipate getting an adequate return on that capital invested over five years? Or are you assuming that profits will be generated beyond that in order to provide a adequate return?

And part of the reason for asking that question is there was an article back in June in Business Day talking about SASSA, and it mentioned that Virginia Peterson, the CEO, commented at some point that the agency itself planned to introduce an automated system of grants payments five years from now. So that implied to me that there was a possibility that this whole thing could revert to the government at the end of this contract.

These are three very good questions. The first one, one, it's not surprising that you call them the losers. So -- but I didn't say it. You said it. And then --

I apologize for the language.

In a sense, if we had lost it we would also be called the losers. So and we probably would also have gone to court. We are talking about sizable contracts here, both financially and in terms of [stability] and in terms of image. So there's absolutely no doubt that I think one or two companies or three companies will definitely go to court, and they are going to follow the normal legal process to try to get information in terms of how was this contract awarded, what processes we followed, did SASSA follow the correct procedures. And from our point of view, we are not SASSA, but certainly, we believe that everything that was done was done with the highest form of integrity.

So although that yes, they will be going to court, there will be people that will try to get other information or injunctions or try to sort of scuttle the project or delay it or whatever the case might be, what now I'm really, personally -- and I am not an attorney, but I'm really not that concerned by what we have seen, that there is any real effects or evidence in their attacks that can be possibly taken seriously by anybody. And of course I would say that. But certainly I can comment on some of the technological areas that were sort of talked about.

And from that point of view I know that there is absolutely nothing that can be attacked in terms of what we can provide. So they will follow the normal course. We will have an opportunity to spend quite a bit of time defending this because we will be automatically a respondent.

The good thing that I'm really looking forward to is that we will now be working together hand-in-hand with SASSA rather than sometimes in the past when we used to be the ones on the other side. So from that point of view I really look forward to be able to build a strong relationship with our SASSA partners. And I am sure that between the two of us, which will be in the position to certainly win any award which are simply based on, as you called it, losing contracts which were significant. So on that side, I think -- let it run its course and I think it will go according to the law.

Your second question is probably more an interesting one. Obviously, there has been a number for many, many years now, SASSA has always looked at saying what was the purpose of SASSA and its formation and what was SASSA going to do in the long term. And we've always known that over time there is no doubt that SASSA would like to play a more comforting role over the distribution of payments of social grants.

Now, one has to try to understand I don't know what that statement means. Today we know that the card we are issuing is actually a bank card, because it's the MasterCard-branded EMV-compliant card, which happens to also have a UEPS application, which is completely integrated into the EMV anti-fraud product. So it's quite an interesting hybrid of what MasterCard's anti-fraud product looks like. It does add biometric, it does add all sorts of other functions which do not exist under EMV at all, so it makes it quite a full EMV system. The good thing, it works everywhere in the country, and it could in fact work anywhere in the world. So from that point of view, we certainly do not need SASSA.

Going forward and saying they are busy working very hard on inventing their own payment system; that's not what we believe they mean. They mean that today, for example, when we provide a function like proof of life, when we provide a function like proof of payment, these are the type of functions that the system was designed to actually be performed by SASSA because what exactly is the point of us telling SASSA that we have proof of payment if in fact SASSA themselves cannot check or are not in control of checking that the proof of payment was in fact the proof of payment?

So the way we read the situation is that SASSA wants to almost through a PPP for lack of a better word, what we call a public-private partnership, want to be able to control the processes around payment, which today, we control. But we still firmly believe that unless the technology fails, there is no way SASSA are going to get into the one to many matching algorithms for biometrics, being it in voice or fingerprints.

So we would become through a PPP, let's call it more of a technological partner, rather than operational partner. Which between you and me as I am getting older, would suit me well because we probably will make similar revenue without actually picking up the most difficult part of everything, which happens to be really operating in rural areas.

So you are quite right. I think it one, I think SASSA's intention is certainly not to say well we are going to do everything and we will not need companies such as CPN.

And two, more importantly, the infrastructure that we are building, that infrastructure will continuously be used because it is not designed, and it was not going to be implemented purely for recipients. It's going to be implemented for everybody it's opened, which means that infrastructure will be used by new customers as well as beneficiaries. So we believe that regardless of what SASSA builds in five years, that infrastructure will continue to be used by SASSA and also by any other customers which candidly might be from other banks or from our own of course banking underwriting. Does that make sense?

It does, thank you. If I may, can I ask two questions about KSNET? The first is did you say that for Q2 the revenues were $28 million with a 28% EBITDA margin?

Correct. $28 million and 27% EBITDA margin.

27%, okay, great. And my second question is in the 10-Q, you mention in a couple of places that you got $4.9 million from the sellers of the company. And the words are in final settlement of any and all claims and contractual adjustments between us and the former shareholders.

I'm just curious, did you have claims against the former shareholders, or is this sort of a release from escrow or something?

It's really a combination of these things. In any major acquisition of this nature, obviously, there is an amount of money that goes into escrow and that's supposed to cover during a period of time any claims in terms of the warranties provided.

There was also very specific a working capital adjustment provision in our agreements with the sellers. And over the last year, we've been working through the issues that we identified after we took control of the business, both from looking at the warranties provided on the one hand, and calculating what the working capital adjustments could be. There were certain tax issues that were also -- that needed clarification.

And finally in November we reached an amicable settlement with the sellers. And the net result of that was a payment of $4.8 million net to us, so net of the working capital adjustments, net of the tax liability claims, etc., that we had. And so going forward the acquisition of KSNET in terms of determining the purchase price and any claims or counterclaims that may exist is now terminated.

Okay, great. Thank you.

John Zaro, Bourgeon Capital.

Hey, guys. You answered my question on Korea, okay.

The option that's given for the 9 million shares, is that a period of time in which -- I mean is there a period of time in which you think that they will come together and exercise that option? And my assumption is they will exercise the option.

Well obviously we can't talk on behalf of our new partners, but the structure of the option is quite simple. It is an option that is granted over a twelve-month period from the date that the actual option is issued. And we expect that to be in the next week or so once we have received all the regulatory approvals required. So from that point onward, the clock stops ticking. Our partners have 12 months to really raise the capital required to exercise the option. We have no reason to believe at this point in time that they don't have any intention of exercising this option. But it's very difficult, obviously, for us to pinpoint a specific quarter when this will happen.

Is it easy for them to raise $80 million in capital?

Well you know it depends, obviously largely as a function of what the share price does on the one hand, which the underlying assets. Also it's a function of some of the other assets that our partners have and can offer as collateral. It's a function of the other businesses and what they generate from those. So it is in the South African context, this is not an unusual transaction. Most companies go through these motions, so I don't have any reason to believe (multiple speakers)

Yes, I just didn't know how often they exercised them. So that was the --.

Is your contract with SASSA transferable? I.e. if someone were to come in and try and buy you or you were to sell yourself, could you transfer that contract in five years?

You mean at the end of the five years?

No, during that five years.

Oh, during the five years. (multiple speakers)

Like if there was an event that took place, is that actually -- does that put it back up for --

My view is right now that at this point in time any change in ownership would certainly -- would have to be looked at and agreed to by SASSA. And not to create any real -- not to create any real impediment. So that's (multiple speakers) works very much, not only (multiple speakers) basis but they work (multiple speakers)

Yes, we've watched that for five years, I know exactly what you're talking about.

Okay, and then the last thing which I had asked you about last year, and now that you've got this settled, there is obviously a lot of work to do and a lot of wood to chop to get this thing done, and it's going to be pretty massive. I'm assuming you had some planning but you didn't have total planning because you didn't know if you were going to win all of them or some of them.

The question is with all these other things that you're always talking about that you'd like to do, and part of your earlier conversation, do you have too many things that you're trying to focus on? In other words, we have this one that finally we've all been waiting for to get some sort of finality to it. Now we are trying to shoot for let's get it published and make sure it works and you make money. And let's try and make money somewhere else. Do we really need to have all these other things that we have? I mean I love the fact that you are so excited about all these other things, but I mean you can only do so much.

I think your point is valid and something that was discussed at our last board meeting a couple of days back. And there is no doubt that we are going to have a good look at -- review all of the different businesses we have.

And when we got into these businesses there was a reason, obviously at the time. We have to review from time to time if those reasons still apply after the event of SASSA. There is no doubt that anything around South Africa, SASSA, EasyPay, the bank, the insurance company, all of that were always part of the same puzzle anyway. So that is going to become for lack of a better word one picture.

And then it's more a question of reviewing what do we intend to do internationally, what products do we want to really focus on, where do we really believe that we can spend time on growth for example like BCC, which I've mentioned before is my own little [pat], and that's something that personally I want to pursue anyway. But you are quite right that there may be one or two other of our businesses that we might look at and simply say the old-fashioned and they not call.

And we certainly do not want to stretch other resources financially, or our management bandwidth chasing something that we might have made an issue of two or three years back, but today the decision, we would not make it again knowing the fact that we now have the SASSA contract bedded down. So I think there will be in my view a few changes taking place over the next couple of months.

Okay, thanks.

Leonard DeProspo of Janney.

Good afternoon and thank you for taking my question. I just had a question with regard to the incremental beneficiaries, given that the ones in urban locations will be more profitable than rural, how do you see the breakout of those incremental beneficiaries? I mean there are 6.5 million new ones; is that going to be more heavily weighted to urban versus rural or vice versa? I mean what kind of visibility can you give us there?

Once again, that's another good question. We know exactly today what is rural both across the whole country and what isn't. So for us, if we are looking at -- let's call it 10 million only it's not 10 million; I think it's 9 comma at the moment; it's 9,763, something like this. And by the 1 of April, of course it will be slightly over. So let's call it 10 million.

I would think that right now as a rough rule of thumb if we say that 5 million are likely to be remaining, what I call rural or semi-rural, and the other 5 million are going to be more urban. Now sometimes people call urban because you happen to be within a city. But you can be living in Johannesburg, and if you happen to live in Soweto, you are really urban but you're really rural, because Soweto is a rural area inside an urban area.

So the beauty of that, the technology and the product that we've now got is that it doesn't really matter because it can be used in one or the other. The question is how much more money do we have to spend because it is rural rather than it is urban?

And Herman talked about -- between I think he said $40 million to $50 million. Obviously a lot of that money is actually going towards developing rural pay points. Now what we must understand here is that rural areas in South Africa are actually quite large. And developing rural pay points like we used to do before for the sole purpose of paying beneficiaries was a very, very high cost.

With the new technology with developing rural pay points, of course to pay beneficiaries, but also to be able to provide services to people that are not beneficiaries, which means suddenly you've funded these rule pay points although initially they are fairly expensive to put together, become cheaper and cheaper simply because they are used to generate other income streams from other people that we could not service before. And that's going to be the crux of the matter.

We already have 10,000 of those pay points. We might actually find we could end up with 15,000 or 18,000 by the time we are finished. Not because it makes financial sense if they were only going to be used for beneficiaries, but because it would make a hell of a lot of sense to use the beneficiary business to actually leverage the rest of the business around where the beneficiary lives. For every beneficiary there is another family of people that are not beneficiaries. And these are a target market for us as well in rural areas.

So to me the fact that it is rural or urban, I think there is more potential, funnily enough, in generating higher revenues in urban areas and -- sorry in the rural areas than there are in the urban areas. Which is quite interesting. But we will see how that goes over the next three to six months.

Okay. Thank you very much. Just one more question, and that was, I just want to make sure I heard correctly, it sounds like the mandate is to have this program rolled out by the September/October time frame, but you're going to shoot for a mid-May launch. Did I hear that correctly?

Well the main launch has to be the 1 of April. And we -- it's a dual launch. In other words what's happening on the 1 of April is that we've got to do a hybrid system in order to ensure that we can replace our existing competitors completely, and basically remove them from the market, because otherwise SASSA would have to negotiate some form of an extension with them.

And that will take about a month to two months, let's call it April and May. And 1 of June will be what I would call is the proper rollout of the new technology core platform and specifically the new biometric smart card. So, but from 1 of April we are taking over the entire payment of all beneficiaries in South Africa regardless about how they are currently being paid.

Okay, great. Thank you.

[Steven Wu], [Alliance].

Congratulations on the SASSA contract. (multiple speakers) what you just said and Serge, your comment on trying to be core and focused, how should we view the Korean transaction? It seems like it's sort of really out there, but the SASSA contract is so much more exciting and significant and prospective. I wonder if you could comment on that.

Well, once again, like I said this is a very, very good question. We always saw Korea as for us the gateway to -- let's call it to other countries around that area in the world. And we certainly did not know how we should try to attack those territories. So for us the Korea acquisition generated many things.

One it was diversification against the rand, diversification against the actual country itself, country risk. And it gave us an income in a currency which as you know is very, very strong. Korea had been actually quite a -- more than just simply a developing country, but basically reaching first-world country status. So for us that was the idea of the Korean switch.

If you look at purely the Korean business which today is really for lack of a better word it's really a switching business, it's facilitating transactions between merchants and banks, there is absolutely no doubt that we all know that the pressure on margins on those particular businesses is very high. We are experiencing the same thing with EasyPay.

So there is no doubt that unless we go are going to be able to refocus the Korean business to doing the type of thing that we are doing here and doing it in a different way and creating new avenues for higher-level or higher-margin businesses, we probably would have to review and to say well, hang on, is this something that we want to spend time, money and management time on? So certainly this is one of the businesses that we believe is doing very well and is growing at a fast pace. But like any of our other businesses, except for CPS, is something that we will be keeping an eye on in order to make a decision going forward.

Very good. And very good luck with the rest of Africa. I think take every country is going to be looking at this and saying great work here; this is an opportunity that we all hope you will be able to capitalize on in the rest of the continent.

We very much hope so.

I think we can take one more question.

Sean Cain, Morgan.

Good morning, guys, and congrats again on the SASSA deal. It's been a long time coming. I've been on board with you guys for about 10 years, and it seems like over this timeframe with this SASSA overhang we've lost a lot of attention in the investing public, and I'm just wondering what if any marketing efforts you guys are going to put forth to make Net1 a household name, number one.

Number two, what if any strategic plans have you all considered to unlock shareholder value?

And then lastly is now that this SASSA deal looks to be soon to be behind you, what is going to be your next big focus? You didn't comment on Iraq at all or any of the pilot programs with SpareBank. Or what is going to be the next big target-rich environment for Net1?

I'll try to sort of answer all of these in one go if possible. I think, one, the SASSA thing for us is a real watershed like for many of our investors as well that probably had lost a lot of patience, for lack of a better word and also probably realize that in fact their investment was not getting the return fast enough from a timing point of view. And fortunately there are certain things you can do and certain things you cannot do.

Now we've put that behind us, which I think will buy us back the credibility that I think we've always deserved, to be quite honest, but more importantly, we have just mentioned that this particular contract will without a shadow of a doubt I believe give us what we need to move into the African continent and also to move into other developing areas, South America being one of them.

And the intention is certainly to make sure that we can take the same solution and offer it to many other places. I believe that with our own new black empowerment partners, there's absolutely no doubt that that has already been tabled. And that's where we see a lot of the growth taking place in that type of similar business in other large countries, for us the large countries, countries with a large number of people.

And all we would have to do is to penetrate or to hit one or two of those countries and candidly Net1 would be in a different position and on a different scale. That's without even mentioning as I say one or two other critical businesses which I also firmly believe will and can get Net1 into a different bracket of return for shareholders.

Okay. Just one other question real quickly, concerning the SASSA deal, now that you've captured the entire area, what -- I'm not sure I was clear on this, I know this is a question for Herman. But what exactly is the margin compression? I know you've said before if you all ever got the deal that you knew that your margins would have to get skinnier to capture the bigger piece of the pie. Do you have any idea what that margin compression is?

I mean the extent of the information we have given is we have given the new kind of revenue run rate. We have said it's been -- it's likely to be at least as profitable on an absolute basis, so I think if you run the numbers you may be able to get to some kind of ballpark number. But we haven't been able to provide that information.

Okay, great. Well I look forward to seeing you guys in May when you make it back this way, Serge.

It will be with pleasure. And at least this way we can talk about -- now that we have SASSA, rather than to get all the questions about when do you think you're going to get SASSA.

(laughter)

So I look forward to it myself.

Thank you, ladies and gentlemen. On behalf of Net1 that concludes today's call. You may now disconnect your lines.