Lesaka Technologies Inc (LSAK) 2012 Q3 法說會逐字稿

Good day and welcome to the Net1 third-quarter review. (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. Good morning and good afternoon to our investors around the world. Thank you for joining us on our third-quarter fiscal 2012 earnings call. 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 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 operation 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 it over to Serge.

Thanks very much, Dhruv. Good morning to all our shareholders. I would like to begin at the beginning with an update of the key trends in the business before I hand over to Herman who will discuss our financial performance in more detail.

I have no doubts that you are all aware that we have commenced the rollout of our SASSA contract, which became effective on April 1, 2012. I am very pleased to report that we have almost completed our second month of registrations and payments and that our technological solutions have proved incredibly robust, effective and reliable as was anticipated. I will spend further time later on to discuss this momentous milestone in more detail.

For third-quarter 2012, we reported revenues of $91 million, which is a year-over-year increase of 10% in constant currency. Fundamental EPS in the quarter was $0.28, down 18% in constant currency. Pension and welfare revenue was flat in quarter three of 2012 as we opened the April pay filing the last six days of March, but received the new lower pricing for those beneficiaries.

KSNET grew 15% in local currency, merchant acquiring was up 16%, and MediKredit and FIHRST showed improving momentum. As of March 31, 2012, we had $88 million in cash on our balance sheet, bringing our net debt position to [$15] million, while operating cash flow during the quarter was $22 million.

This quarter I will focus my discussion on the implementation of our SASSA contract, as well as the review of some of our key businesses.

Our co-established businesses, which include, as you all know, CPS, KSNET and EasyPay, together in quarter three of 2012 accounted for approximately 83% of our revenue and the majority of our profits. Our growth businesses, which include Net1, UEPS, MediKredit and FIHRST, and collectively they accounted for around 7% of our revenue.

Moving on to our pension and welfare business, we are very pleased with the progress made towards the implementation of our new SASSA contract, under which we begun the distribution of social grants approximately 9.2 million beneficiaries across all nine of the country's provinces. The contract to defect on April 1, and we have now dispersed grants for two months under the new contract.

Our implementation schedule is two key phases. The first one is targeted, is largely complete, and requires us to issue roughly 2.5 million MasterCard-branded debit cards to beneficiaries in the provinces we did not serve previously.

To assist us with the substantial enrollment courses and issuance of cards, we hired approximately 2200 temporary employees in March and April. For the May pay cycle, we have already distributed over 85% of the grants for the month in a seamless and efficient process.

Beginning June 1 and running through March 2013, we will implement Phase 2 of our deployment strategy, which will require biometric enrollment, both fingerprints and voice, and issuance of our EMV UEPS-compliant Smart Cards.

We will also be performing a one-to-many biometric search using our own search engine to eliminate duplicate registrations. We are currently playing in excess of 4 million beneficiaries through electronic transfers into existing banking accounts and approximately an additional 5 million beneficiaries at our 11,000 pay points in at participating merchants, other merchants and ATMs.

We have also already opened in excess of 1 million new bank accounts at [Greenwood] Bank with whom we have a long-term technological business relationship.

We are currently discussing the rollout plan with SASSA regarding the 50 million plus registrations we have to perform over the next 12 months. The final rollout plan will be determined once we have implemented our first national pilot during the month of June. Once the system has been functioned, a decision will be made both by SASSA and us as to the final timeframe and deployment methodology. This initiative is, of course, massive in its complexity and will have far-reaching implications inside South Africa from a social, political and financial point of view.

Net1 will soon be reaching millions of South Africans in all cities and villages and providing them with a choice of transacting channels from the commonly used banking cards to the functionally rich UEPS EMV product. Financial Services will also be provided.

Biometrically secured mobile banking and biometrically secured across all non-enabled banking ATMs and point of sale devices will also be provided. We believe this to be a world first.

To achieve the above, we have to build a comprehensive state-of-the-art distribution platform. While we have a number of the key ingredients, which are already in place with 11,000 pay points in the rural areas, 50,000 EasyPay terminals and a further 5000 rural point of sale terminals, we have to tie all of these together on a national basis, including ubiquitous biometric verification and service delivery.

To achieve these objectives, we expect to spend $45 million to $50 million cumulatively in capital investments on card terminals, biometric readers, backend service, backend processing systems, voice biometric technology, call centers, cash dispensers, vehicles and many other technological and logistical products. We expect to recruit a further 400 temporary employees to assist with our Phase 2 implementation and expect that once our implementation is complete, our full-time employee base will be roughly 900 to 1000 people higher than our pre-contract levels.

As a reminder, our mission is and always has been to provide an alternative payment system to the majority of citizens within a territory. Specifically those that are normally excluded from the economy and know that they have little or no access to competitive Financial Services and/or retail products.

To this end, we have spent many years developing our technological platforms in order to service all of these citizens, including those who reside in deep rural, semi-rural or, in fact, urban areas regardless of their financial status. The absence reliability of the performance of the infrastructure such as electricity, communication, Financial Services, retail outlets or any other delivery channels. Our solution comprises of our very latest technological breakthroughs in terms of biometric verification using voice and fingerprint and specifically our new version 16 EMV-compliant UEPS suite of transactional product as approved by MasterCard, as well as our newly announced [euro network 12 met] 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 new participants. The combination of these technologies ensures that we can provide the tools that are required to announce service delivery, protect the frail, disabled and the most vulnerable and eliminate avenues for fraud and the abuse of consumers.

Our technology and infrastructure is designed to address the needs to multiple constituencies, including welfare recipients and those that have been excluded from participating in economic activities due to existing rules as set by Financial Services 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, in fact, eliminated.

Net1 is now positioned in such a way that it can continue to provide SASSA with a most efficient and effective payment system on a national basis, but 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 whilst keeping the highest levels of social responsibility, the preservation and feeling of rural economies, and most importantly, to ensure financial inclusions for all South African citizens.

While we focus on this challenging project, we will also seek to capitalize on our international opportunities in Korea, new international UEPS deployments, our mobile Virtual Card and our XeoHealth initiatives.

Let me now briefly address some of our other key businesses and developments. For KSNET, one of the leading providers of card processing in Korea, revenue grew 15% in local currency and improved its market share in the country. We continued our special promotions for South Asians to further penetrate the small- and medium-sized merchant markets, and we expect to see the benefits of those investments over the remainder of calendar 2012 and, of course, beyond.

The KSNET management team is now also actively engaged in understanding Net1's broad product portfolio with a view to introduce certain of those products both in Korea, as well as in surrounding territories. As we had anticipated, KSNET will continue to grow as a Korean business by diversifying its business activities, but more importantly by becoming the hub for Net1 to aggressively address the Asia-Pacific region with our payment products and technologies.

For EasyPay, during quarter three of 2012, we continued to refocus the business towards higher-margin, value-added services and away from low margin switching services. In Q2 one of EasyPay's large customers decided to move its basic EFT switching business in-house, but we have retained all of the value-added services we provide to this customer, which is still a majority of our volume. As a result, we expect some but largely immaterial impact on the operating income of the business, but certainly an improvement in its margins over time.

EasyPay's competitive differentiation has also begun to improve substantially this quarter as we began our implementation of the SASSA contract. The allure of over 9 million recurring customers has led to strong interest from all retailers for ground distribution, as well as suppliers of value-added services like telecom companies, bid issuers and municipalities.

NUETS have developed a new limited investment software as a service business model and to reduce upfront capital investment by 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, following the capital of new countries over the next couple of quarters.

We are satisfied with the growth in transaction revenue from Iraq, but are excited because of the interest demonstrated by many developing countries in our UEPS, UEGS, VCC and, of course, our latest, UEPS/EMV solutions.

XeoHealth, our healthcare claims processing subsidiary in the US, has already began claims education for CBH in Pennsylvania, and we have begun testing for the recovery audit contractor services for north [Baqutine] Missouri. These [Orace] services are expected to commence around September of this year.

Lastly, on Mobile Virtual Card, we are in active testing phase with Banamex in Mexico and in the process of restructuring our global initiative in order to ensure scaling and drive awareness and adoption.

To conclude, I believe that the new SASSA award will once fully implemented provide greater visibility, profitability and, therefore, confidence to our existing and new shareholders, and in turn reflect a truer valuation of the Company. I believe that our management team, our technology and our diversification strategy in terms of currency, country and market segmentation will allow Net1 to regain its initial appeal with the lower risk profile and thus deliver improved returns for its stakeholders.

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

I will discuss the key results and trends of our significant operating segments for the third quarter of 2012 compared to the third quarter of 2011. I will also discuss to the extent possible the financial implications of our new SASSA contract.

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 Q3 of 2012, our average rand/dollar exchange rate was ZAR7.85 compared to ZAR6.99 a year ago and negatively impacted our US dollar-based results by approximately 12%. The year-over-year comparability of our results for the quarter were affected by the acquisition of Eason and in 2011 the intangible asset impairment.

On a consolidated basis, for the third quarter of 2012, we reported revenue of $91 million, an increase of 10% in constant currency. Fundamental earnings-per-share was $0.28 compared to $0.38 a year ago as our previously discussed startup costs associated with our new SASSA contract weighed on profitability this quarter. We measured the group's profitability by looking at operating income and margin by segment.

Between our segments, FA transaction-based activities posted revenue of $46 million during Q3 2012, 10% higher in local currency driven by relatively flat revenue growth in pension and welfare, a 16% gain in merchant acquiring, an improving performance at MediKredit and FIHRST, as well as the inclusion of Eason.

Our segment operating margin declined to 19% from 39% last year, primarily due to the startup costs for the SASSA contract, as well as the inclusion of Eason's prepaid e-com business, which has by its nature a high-volume but low margin business and high intangible amortization.

To reiterate, we expect profitability in the segment to remain under pressure for another two to three quarters as we continued to invest in the infrastructure, distribution and personnel required to disperse growth on a national basis before returning to a more normalized and sustainable level.

Our international transaction-based activities posted revenue of $28 million during Q3 of 2012, an increase of 29% in constant currency and 14% in US dollars. Segment operating income includes additional startup expenditure related to the launch of our Mobile Virtual Card and XeoHealth initiatives in the US and Mexico. For Q3 of 2012, KSNET generated revenue of $27 million and an EBITDA margin of 29%. This is seasonally the slowest quarter for KSNET given the winter months in Korea.

For our Financial Services segment, revenue in Q3 2012 increased 19% year over year in constant currency to $2 million, principally as result of an increase in the number of UEPS loans provided.

Segment operating margin continues to be adversely impacted by the startup of SmartLife, our insurance business, and was 55% in Q3 2012 compared to 71% last year, but up from 53% last quarter. Our Q3 2012 interest expense decreased by 9% in US dollars, driven primarily by lower average days outstanding during the period.

I will now provide some additional detail of the anticipated financial implications of our new SASSA contracts. Our new contract became effective on April 1, under which we are required to enroll approximately 15 million grant recipients and issue approximately 9.2 million payment cards initially. We will be paid ZAR14.42, excluding value-added tax per beneficiary paid, which translates to approximately ZAR153 million revenue per month.

During Q3 we include SASSA-related expenses of approximately $7 million, which include roughly $5 million in bonuses paid to certain executives and key personnel in recognition of their contributions to the compilation of the successful SASSA tender, the development of new technologies and the support provided for the implementation of the tender.

To reiterate, once we are fully phased in, we expect at the very least to maintain our operating income on an absolute basis that we generated from our current contract. We currently expect to be fully phased in by the third quarter of fiscal 2013.

In Q3 we expect $14 million on capital expenditures, of which roughly half relates to infrastructure such as payment vehicles for our new contract. We continue to expect cumulative startup capital expenditure to be between $45 million and $50 million over the next 12 months with roughly 2/3 to be incurred by Q1 2013. Over half of these investments relate to infrastructure such as payment vehicles, equipment and branch network, while the majority of the remaining investments relate to payment cards and terminals. Our operating expenses should increase proportionately with revenue due to higher headcounts as we employ additional people responsible for initial enrollment and issuance of cards, as well as ongoing payment related directly to the distribution of grants.

Direct implementation costs are expected to increase during the commencement of Phase 2 of the rollout given higher personnel costs, biometric enrollment and other direct operational costs.

As of March 31, 2012, we had $88 million of cash and cash equivalents on our balance sheet. During Q3 2012, cash flow from operations was $22 million, and capital expenditures were $14 million. The change in our cash position from December 31, 2011, was due to positive cash generated from operating activities and $5 million related to fluctuations in exchange rates, offset by a $5 million unscheduled principle debt repayment.

Our tax rate mainly fluctuates, depending on our intention regarding undistributed South African earnings and the timing of any payments, but we expect our effective rate going forward to generally remain between 36% and 40%.

Our fully weighted distributed share count for Q3 2012 was 45 million shares. On April 19, 2012, we granted the one-year option for 9 million shares under our BEE deal. Assuming that the option is exercised in full, we would receive proceeds of $80 million and issue 9 million shares. Once exercised, our issued share count would be approximately 54 million shares, assuming we use none of these proceeds to buy back our stock.

As previously disclosed under US GAAP, we will be required to book a non-cash stock-based award charge of approximately $11.7 million in Q4 2012. Our priorities for uses of cash remain capital expenditures, strategic acquisitions, buy-backs and debt repayments.

To conclude on guidance, as mentioned previously, the next two to three quarters are difficult for us to predict given the timing and quantum of investments and startup costs to be incurred to ensure the implementation of our SASSA contracts. However, for fiscal 2012, we expect fundamental EPS to be at least $1.40 on a constant currency basis -- that is at ZAR7.00 to the $1.00 -- and using our third-quarter share count of 45 million shares.

It is worth noting that the current rand/dollar exchange rate is around ZAR8.00 to the $1.00 and would have an adverse impact on our reported results. As always, fundamental earnings exclude amortization of intangibles, stock-based charges and other one-time items.

With that, we will gladly take your questions.

(Operator Instructions). Dave Koning, Robert W. Baird.

Good job. So my first question is, I know you've talked quite a bit in the past about how getting the big contract under your belt now and giving that option out to the BEE initiative, that that could help you kind of free up some time get in conversations with new countries, etc. I'm just wondering, has that started to materialize? Have you seen a lot of more activity talking with other countries now about your services or other constituents? I just wonder how that has progressed.

As you know, we have just basically started the implementation of the SASSA contract on a national basis. There is absolutely no doubt that this is something that is going to take a little bit of time to bed down. As you can well imagine, those issues we are talking about probably the largest subject ever, ever commenced in this country, and it defects around 15 million to 17 million people that are all very much in the poorest of the poor segment.

So we are spending quite a lot of time nurturing this project and making sure that our President, President Zuma, will actually be attending the very first official registration at the beginning of June. And once I think we have got that over from the let's call it the political framework, I think we will be able to go back to business as usual and for the executive of the group to start focusing on growing the Company outside of the SASSA contract.

However, I think you all know and you are all aware, very much aware or I'm sure you have all worked out, that having access to 10 million people who are all receiving a grant on a regular basis and having an infrastructure, which becomes national and allows us further access to a further 10 million people, that today are more in the un-banked arena, but employed, gives us some massive opportunities to actually create probably what could be the largest retail bank in this country.

We obviously are going to be spending quite a bit of time continuing with a particular vision. And the major driver beyond this is what you probably read about, which is our latest version 16 UEPS EMV-compliant, MasterCard approved card, which really allows us to interoperate with the South African national payment system wherever it exists. For that together with our own infrastructure in rural and semi-rural areas probably gives us the largest infrastructure in South Africa compared to anybody else put together.

So we are going to be spending quite a bit of time on that. In the meantime, to address some of your other parts of your question, there is no doubt that the success we have now had in South Africa, which has been demonstrated over the last two months has already opened doors to many different African countries and other developing countries that are saying, yes, if we can have this technology that allows us to provide and to do financial inclusions for everybody in rural and semi-rural areas in a secure manner using biometric, but at the same time the same card can be fully EMV-compliant and utilized anywhere in the first world infrastructure, then I think we have got something that most countries actually are wanting to have.

And that is something that we are already noticing, and we have already got people traveling all over Africa right now as we speak that are discussing with governments, no longer with single banks or perhaps financial institutions on the one-off, but are more now discussing these issues at government level that have now recognized that this is the technology for the future for people in countries to have as a general offering rather than a specific one.

So we believe, to answer your question, that we are going to see acceleration in our penetration of developing economies and developing markets simply because we have a product now that actually links both un-banked and banked people together.

Great color. Thank you for that. Then, secondly, just on the financial impacts, a couple of things, first of all, sequentially just so we kind of understand it, it seems like the discussion of the number of beneficiaries and the amount paid that sequentially revenue would be up about $15 million or so.

And then I guess my second question around that is, you have talked about the $9.2 million that come on at ZAR14.42 per beneficiary, the other $5.8 million or so that gets us to the $15 million that you talked about in total that presumably have bank accounts already, where will the revenue from that show up and how much would that be?

Let me just clarify the numbers for you. The $15 million beneficiaries that we have to enroll are all the grant recipients in the country. So those include all of the children that for today are grant recipients or beneficiaries, but the grants are actually obviously paid to their legal guardians.

The part of the new tender proceeds is that all the beneficiaries in the country need to be enrolled, simply because from a fraud elimination point of view, if you don't have the higher population of grant beneficiaries registered, you cannot perform all the required tests and checks that was part of our vendor process in order to eliminate the duplicates or the invalid grant recipients.

So, in a nutshell, we have got approximately 15 million recipients of beneficiaries of grants in the country. Of those, probably slightly more than half, I would say approximately 8 million or 9 million, probably 9 million of them are child-support grants. Regardless of the age of the children, we will have to enroll them -- it is part of our offering -- and biometrically enrolled them, but we obviously don't issue them with a card because they are not of the appropriate legal age to become a bank account holder. The card is issued to the legal guardian of the child, and he then, or she then, becomes the grant recipient.

And of those, we have 9.2 million people at the moment. Obviously SASSA anticipates if we look at the data that they published as part of their annual budget reviews, they still anticipate the number of grant recipients, as well as beneficiaries to grow probably in the region of 3% to 5% per annum.

Having said that, there may, of course, also be a slight reduction in grant and recipient numbers once we have performed all of the validation checks to eliminate the duplicates, etc. So we also have to keep that in mind. By the way, there is no guaranteed minimum as part of this agreement in terms of the number of beneficiaries. There is also no maximum in terms of the grant beneficiary.

And so if we just do a quick reconciliation of what we expect from a revenue point of view from the first of April, we had 9.2 million grant recipients. Those get invoiced at a rate of ZAR14.47 each, excluding that, and so that gives us a total of [ZAR153] million of revenue per month. Assuming that a number of grant recipients stay constant, that number will also remain constant for the next 60 months. There is no additional revenue charge for the enrollment of the additional child-support grant beneficiaries or recipients. As the contract progresses, the cost of enrolling new beneficiaries is automatically already included in the service fee that we will charge for those additional beneficiaries.

So there is no additional revenue other than, of course, whatever additional goods or services or merchant acquiring initiatives may be a result of what we offer this base of 9.3 million cardholders.

But as far as SASSA is concerned, there will be one invoice that goes to them per month. At this point in time, that invoice is for ZAR153 million, and they will pay that invoice within the 50-day period that they have.

Okay, great. And maybe just as we look at the revenue, I mean is it fair to say using those numbers the way that we did, I think revenue in the core South Africa business goes up about $15 million sequentially. Is that at least in the ballpark? I just want to make sure that we are somewhat close.

Obviously that depends on the rand. But I think you have obviously got your models and assumptions for the rest of the business. The SASSA-related business will be ZAR133 million per month give or take a number of people. So that times 3 gets you your quarterly figure.

Tom McCrohan, Janney.

I had some questions on guidance, but I just wanted to piggyback off of the last stream of questions.

If over time Net1 introduces other value-added services through these same grant recipients, be it insurance or whatever, healthcare or whatever other products you might come up with and sell to that similar base, do you have to share any of the economics on any of those value-added services with SASSA?

No, the answer is no. SASSA is not a for-profit organization. They understand they we went in at what we believe is pretty much a cutthroat price in order to provide an infrastructure throughout the entire country that could deliver what they were looking for, which is really service for beneficiaries mainly followed by elimination of fraud and obviously reduced costs, which is what any government would like to achieve.

The counterpart to that is that we are to be able to build a model that allowed us, of course, to be able to generate alternative profit income streams, and those alternative profit income streams will be delivered for a number of things. One is obviously us being able to sign up mainly other poorer people that are not banked today using our infrastructures because it is the same infrastructure, which, of course, for us is great because it will fall to the bottom line. Two, Herman spoke about the children and all the children that are enrolled. But obviously as these kids get to the age of 18 and 19, they automatically will be handed over a banking account through us, which means we are hoping to pick up all of those new accounts as they grow beyond the age of 18.

And, of course, thirdly we intend -- and, by the way, we do work with SASSA closely in terms of providing certain Financial Services like, for example, value-oriented insurance or small marked for loans in order for us to be able to know that we are very much competitive, very aggressive, and we actually structure them in a way that is now going to basically put all of our pensioners under from the financial position.

So working with SASSA we believe gives us a huge advantage to be able to tailor made certain financial products that might not be as lucrative as what other people sell them for. But, of course, we would have obviously the numbers that we can multiply by.

So if you add those three components together, we firmly believe we can build a business over time that could be as exciting, as big if not bigger, than the revenue that we make out of SASSA itself.

Okay. At the 9.2 million grant recipients today, can you break that down into urban versus rural?

It is always an interesting question because rural becomes sometimes urban and urban sometimes become rural. But on average I would go as far as saying it is a 50-50 split right now, as we speak. But we are already seeing even after two months of operation with the new system and people having the ability to go now anyway being at the existing infrastructure of the banks, be it our merchants, being the bank's merchant or being our pay points, we are already finding ships depending on the provinces where people find it easier to go to an ATM or to go to a shop or, in fact, ATM people now going to pay points simply because it is cheaper for them than to pay ATM fees.

So give us a couple of months to first get more people on board, and then I think we are already monitoring the shifts statistically to see what is going to happen. For us it is getting to the stage whereby from our technological point of view, rural or urban makes no difference to us whatsoever in terms of what we make. Obviously our cost in rural areas it is higher, but because rural areas have no infrastructure, we can now service far more people that are not pensioners in rural areas because we have no competition because there is, in effect, no one there to compete with us with infrastructure.

So either way we look at it, we think that we probably are likely to make the same sort of money in the same margins and the same income to beneficiary in time, regardless if they are in rural or, in fact, they are in urban areas.

And then a couple of questions on the guidance. Does the $1.40 per share include the $11.7 million expense disclosed in the 10-Q related to the stock option or issued to BEE?

No, it does not. The guidance that we provided is the fundamental earnings-per-share. The stock comp charge that will follow in Q4 is a non-cash charge. Obviously in terms of US GAAP, we have to recognize the expense, even if those options have not yet been exercised. So for that specific reason and because it is a non-cash item, it gets added back for fundamental EPS purposes.

And the direct versus capitalized, can you give some guidance on the $45 million to $50 million of capitalized expenditures related to this whole SASSA ramp of the new contract. But what falls to the P&L is the direct stuff, so you had $7 million this quarter, most of which was a cash bonus paid to executives. Is there any guidance around the direct expenses that are going to be incurred? It sounds like it's going to be headcount, some of it temporary, over the next several quarters?

It is difficult for us right now to give it an exact quantum. The personnel or the headcount charge is really going to be driven through the continued employment of some temporary workers. If you look at the table that we provided, we have 2200-odd temporary employees at the peak of enrollment. We expect once enrollment is finished to retain 900 permanent employees out of all the additional ones that we have employed. And really this is something that will be driven also by SASSA's direction that they provide us in terms of the rollout plan and the pace sometimes in which they wish to proceed in specific areas and provinces.

So while we anticipate to finish in the third quarter of next year, I think what we will see is that the overage charge or the direct expense charge as it relates specifically to the enrollment will be fairly erratic over the next two to three quarters, and it is quite difficult for us right now to give you an exact number around that.

Okay. And the phasing being complete by the third quarter of fiscal 2013, I thought last quarter it was going to be done by the second quarter. So I mean just give us a comfort level on why it kind of bumped out a quarter? It is only a quarter and your comfort level with this now revised completion date.

The whole rollup time, obviously as you can imagine, is a very big logistical exercise. It does not only -- unfortunately sometimes we cannot require our planning and inputs, but there are many other stakeholders that are involved in this process. Obviously other factors that one has to take into account is the availability of the resources required, specifically modules for cards, the ordering lead times for those.

You have to also take into account the fact that the service level agreement was only signed in the first week of February, and it really only gave us six weeks to prepare and to commence the payments on the 1st of April for 9.2 million beneficiaries.

So, as we are going along, there is obviously daily, sometimes hourly consultations with SASSA in terms of the rollout plan. It changes from time to time, depending on specific circumstances, and that is why already for the last couple of weeks you would have seen a slight change in the plan that we had. Be that as it may, we obviously paid all 9.2 million beneficiaries on the 1st of April.

So there is absolutely no impact on the revenue side of things in terms of whether we complete or when we complete or finish the first or the second phase. It is simply a matter of the rate at which we do the biometric enrollments for the entire card holder population.

Yes, understood. I know it is difficult to have visibility into it.

The last question I have is on the cash bonuses. Is there any other compensation cash or otherwise that is forthcoming related to the SASSA contract? I did not -- I was not aware until I read the press release that there was a cash bonus pool that was going to be paid out after you guys award the contract.

There was an 8-K filed with the details of the bonus award back a quarter ago in our second-quarter results, and that has all of the details you are looking for.

Okay. Can you remind me, Dhruv, are there any clawback provisions? Like if -- the milestones are not met or given the guidance that the contract -- this new contact can be contributed at least as much operating profit as the prior contract, and if that does not happen, are there any clawback provisions with the bonuses paid out?

As I understand it, there are related to the stock component of the awards.

Kevin Tracey, Oberon Asset Management.

So you guys have said that you expected the operating profit on this new SASSA contract to be at the very least the same as the old contract. In order to execute this contract, you have to invest a significant amount of cash capital.

So I'm curious in terms of a NPV, do you guys expect a positive NPV within the first -- within the five-year term of the contract? Or in order to get to that positive NPV, you are assuming that you will be able to sell additional services based using your infrastructure after this five-year term is up?

We expect to have a positive NPV on the investment required over the term of the contract, regardless of the additional goods and services that we may sell during the five-year period. So the way that we have calculated our capital investments and obviously the anticipated revenue and income flows indicate to us that the NPV over five years should be a positive number.

Okay, great. And then with regard to your Korean business, it seems like it is doing quite well, and you guys have talked about the benefits of diversifying out of South Africa. But I'm wondering now that you guys have won the SASSA contract and you are clearly going to be focusing on developing your South African business, if you guys might consider a sell of the Korean business to focus on developing that South African business further?

This becomes a strategic question. If one looks at things logically, what we try to attempt to do in South Africa is something, as you all know, we have been trying to do for many, many years. And I think we have been working hard enough and lucky enough and fortunate enough to have pulled it off.

That does not change our view in terms of the size of the South African market and the rural market when we compare it to the worldwide market. The South African market is still very much small. We can certainly make a lot of money here, and we know that is the case, and we will continue to do so.

But for us, we have to have a vision that allows us to actually deploy our technology also in the world. And we still see Korea for numerous reasons, both some of our first world products like, for example, with companies like Samsung, certainly with VCC, which are where we see huge opportunities, and of course, where we want to penetrate or play a role in these markets, the Asia-Pacific RIM for lack of a better word, we are very interested and are starting to become very interested in our technology, specifically our EMV UEPS technology, we need to have technological support and expertise in those particular areas in order to make it up.

And we have always said that our Korea acquisition was not only for diversification from South Africa from the rand, but also to give us a foothold where we can actually expand in these particular areas with people that are part of the house, rather than with consultants or with the other types of programs.

So for us, we don't see any real reasons right now why we would even consider the selling of KSNET as we have a couple of big plans with them both locally in Korea in terms of expanding their own business, but also to use it as a sales -- as a trampoline to actually definitely push our technologies elsewhere.

So we will certainly continue to monitor its performance. There is no doubt about that. But I think you are going to -- we are all going to be quite surprised by what one can do with this.

And my last question is with regard to the EasyPay business. I know that you said that you are shutting down some of the lower margin components of that business. But looking at your 10-Q when you break out the discontinued in core business, it seems as though the core business has shrank a little bit as well. Can you give a little bit of an explanation for this? Do you have an idea if something has fundamentally changed with regard to that business?

Yes, I think if you look at EasyPay -- and, once again, you have got to try to get into our heads when it comes to what do we do and why do we do it and what is the strategy around it. For us EasyPay, remember, was giving us the entry point to many merchants through our switching.

Because of the switching, we then started to get into providing these versions with value-added services such as electricity, such as money transfers, etc., etc. So that was the game plan. That actually allowed us to get these versions to sign with us in order to become participating players within the SASSA contract where we can now actually generate revenues out of the money that is going to be spent in merchants rather than to worry about the $0.10-odd that is going to be paid to us by merchants because of switching.

So you will find that the EasyPay business is going to start to diversify a little bit, and it's going to move away from purely being a switching company and focusing on value-added services on one side and, of course, for the group to start looking at merchant acquiring. Simply because the products that we can deliver through merchant acquiring are not products today that most banks can deliver, and because these merchants are enticed by the 9 million or 10 million beneficiaries that are going to go to them, it gives us a huge advantage to actually package the two together.

So the loss that you have seen -- that I believe you have seen is the one which is geared to, I think, switching for one of our customers that decided to take the switch in-house. What you are not seeing at this point in time is that that is going to be converted into merchant-acquiring fees that are going to be coming back to us, and those fees are going to be greater than what we lost. So you might find as good a swing from one company called EasyPay, and it is going to move into another segment.

So we are going to try to be a little bit more clearer as we go along. I know Herman has been working on the segmental analysis for quite a while now, and we are going to have to restructure those in my view in a different way because right now they are becoming a little opaque simply because things can move from one to the other and nobody really knows where it is coming from in the structure. So you will see that these things are becoming a little clearer, but EasyPay, in my view, is going to actually grow faster now than what affected it in the past.

Just to go back on the specific transaction numbers that we have disclosed, last quarter we had said that one of the customers had moved there switching in-house. So you only had a partial quarter impact. So in Q3, you saw a full quarter impact.

Okay, great. Well, thank you very much, and congratulations on the quarter.

John Helmers, Swiftwater Capital.

I'm relatively new to the name. One of the things I wanted to ask was just there has been a lot of noise around the SASSA deal, at least in the local papers. And is there -- I guess by competitors that lost out, is there any risk that somehow this get blocked? Could there be some sort of clawback that you would have to pay these competitors some portion of your profits? What, if any, and how should I think about what the risks might be?

Of course, that is a very, very good question. For me the only thing I'm categorically about telling you is that we are not likely to pay anything to anyone. That is point number one.

We have never done any deals based on that type of thing. You are right. There has been some -- there has been a number of press articles that have come out in the press, which obviously and candidly these articles have been particularly wishy-washy and certainly the losers of the tenders may very well have behind the generation of these articles. Obviously it is a massive tender, and we were expecting some sort of comeback.

There are a couple of lawsuits that are taking place, and at the end of the day, we -- certainly in the Company, we have taken all that very, very seriously. Our Board has taken it very, very seriously. Everything has been looked at. Everything has been analyzed. The beauty about being, I suppose, an American company and playing the rules according to Sarbanes-Oxley and FCPA is that we have been keeping on those clean for the last six or seven years or even beyond that, but according to the American laws.

So we have absolutely no issues within the companies in going to court and having this particular thing looked at, analyzed, reverse engineered in any way that they wish to have it.

So we do not see any reason right now to believe why this particular contract for any particular reason of this nature be stopped, revoked, canceled or out or anything else.

I think we did mention last time, which is I think very, very important, is that SASSA we believe is particularly happy with what we have done so far been. I think there has been already a huge improvement to a lot of our beneficiaries, and I think at the end of the day the South African government is far more concerned about delivering the service than they are about a few articles in the newspaper.

Understood. No. That is very helpful. Thank you very much.

We have time for one more question.

John Zaro, Bourgeon Capital.

I just have a couple questions. One, I know that we have signed the formal process of the outside investors from South Africa coming in. Do we have any timeframe? I know there is a date that they have to come up with the money by a certain date, but do we have any sort of timeframe for whether that gets hit sooner, later?

Sure. It is very simple. They have one year from the date that the option was granted to them. That was, I believe, April 12. So by April 12, 2013, they need to exercise the option either in part or in full.

Is there any sort of precedence for how they do that? Is it usually done sooner or later or at the last second?

It is all a function really of the financing arrangements that they would need to take into account that. Obviously to a arrange the funding for approximately $90 million in the South African context becomes an aspect that needs to be considered. The South African banks are obviously very familiar with these kind of transactions, and there was a news article yesterday, I believe, that says that South African banks will provide ZAR97 billion worth of BEE financing by 2015.

So it is certainly an area that is very much focused on at the moment. But be that as it may, every case is considered on its own merits, and our partners obviously need to approach the various financial institutions that they believe will be favorable to their requests. And once that is complete, they will obviously immediately exercise the specific options.

I think in there -- I cannot speak on their behalf, but I would imagine that for them it would be better to exercise sooner rather than later, simply because there is also a lockup period that is inherent to the shares, and I'm pretty sure that they would want that period to start as soon as possible.

All right. And then my second question (multiple speakers) I'm sorry?

I was just saying, just in addition to that, there is no doubt in my mind that our BEE partners have got a very, very strong belief in how they can help us elsewhere outside of South Africa with our business activities, and as such, they would definitely like to participate and to become a fairly major shareholder in the Company as soon as possible, sooner rather than later. And for them right now, the price or their share price is really academic. They are more interested in getting in and to play an active -- a more active role rather than to wait for another six or nine months.

Got it. Okay. And then my second question, I think we talked about this once before, but I'm not quite sure. Explain to me the principle of why you get paid a bonus to do something that you were working to do as a regular course of business? In other words, this is the major part of your business. You have been working on it for years and years and years. We have all suffered waiting for this contract to get done. Not to say that you should not get paid some bonus for something, but why such a -- why -- I mean isn't this the course of you running this Company to get this thing accomplished?

I think --

In other words, that is why you come to work every day was to get that -- to get it accomplished.

Yes, and I think you are probably right. That is definitely one of the reasons that we have been coming to work every day. You know that we accomplished this particular thing.

I think simply the -- and it is difficult, I suppose, from where you are to understand what is involved in doing what we have managed to do over the last couple of years, not only in terms of winning the tender, but positioning the Company in South Africa to become a completely different type of animal, simply because I don't think there are too many other people that are going to hook up more than a quarter of the South African population as new customers and having the power to very, very possibly extend that to about 40%.

I think our Board who lives here recognizes what has happened over the last, not year or two years or three years or four years, but perhaps in the last 10 years, in order for us to ensure that we keep on positioning ourselves in a place where, in fact, we could have lost this particular tender on a number of occasions, and we have always managed to keep our heads above board and to wait for the next opportunity for us to be able to seize the day and basically take the whole lot. And I think the Board decided that it was as a reward, it would be something that they should do in recognition of what the executives and many of the other staff members of Net1 have done over the last five years. And I can assure you that it has not been maybe a walk in the park, not like any other business is necessarily a walk in the park either. But it was something in our view that was a turning point and is a turning point for Net1 where Net1 we believe now can actually begin again and be recognized again as a Company with a potential for growth as it were five or six years ago. And we think that that is something that is going to be substantially rewarding for all of our shareholders, and there is no reason why it should not be rewarding for the executive business staff as well.

Thank you very much, sir. Ladies and gentlemen, on behalf of Net1, that concludes this conference. Thank you for joining us. You may now disconnect your lines.