Lesaka Technologies Inc (LSAK) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Net1 third quarter results. All participants are now in listen-only mode, and there will be an opportunity for you to ask questions after today's presentation. (Operator Instructions). Please also note that this conference is being recorded.

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

Thank you, Dylan. Welcome to our third quarter fiscal 2013 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 ask 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, on this call we will be using certain non-GAAP financial measures and we have provided a reconciliation of these non-GAAP measures to the most directly comparable GAAP measures. We will discuss our results in South African rand, which is a non-GAAP measure. We analyze our results of operations in our 10-Q and our press release in rand to assist investors in understanding the underlying trends of our business. As you know, the Company's results can be significantly affected by currency fluctuations between the US dollar and the South African rand.

As was the case last quarter, we will be making limited comments regarding the government investigations, but will not be taking any questions on the subject.

With that, let me turn it over to Serge.

Thank you, Dhruv. Good morning to all of our shareholders. On today's call I will provide an update of our SASSA implementation, the government investigations and some key trends and developments in our business.

On quarter three of 2013, we reported revenues of $111 million, which is a year-over-year increase of 32% in constant currency. Fundamental EPS in the quarter was $0.05 compared to $0.28 a year ago, largely due to the result to the implementation cost incurred to rollout our new SASSA contract.

Our core established businesses, which includes CPS, KSNET, and EasyPay, together in quarter three 2013 accounted for approximately 79% of our revenue, while our growth businesses were collectively around the 5% mark.

Our national SASSA contract commenced on April 1 of 2012 and our phase II implementation commenced in early July of 2012. During quarter three of 2013, we have paid approximately 9.6 million beneficiaries almost ZAR9 billion per month. We have also completed 10 months of registrations on behalf of SASSA, and our technological solutions and processing platform have proved extremely reliable, effective and secure to the full extent anticipated.

Our experience so far has demonstrated that not only does our technology identify and eliminate duplicate grants, but it also led to a number of illegal beneficiaries returning their existing cards because of their fear of being caught out during the re-registration process. According to SASSA more than 110,000 grants have been canceled, which, by themselves, resulted approximately ZAR1 billion of annual savings to government.

56% of the social grants were distributed through our pay points and Net1 merchants, while 44% were distributed through national retailers and ATMs. While still early to comment on any definitive trends, broadly speaking we are seeing some shifts towards accessing grants through our pay points and merchants on both UEPS and EMV, and fewer recipients going to ATMs. All recipients who have been registered are automatically provided with a bank account through which they can perform any type of transaction, banking transactions.

As of May 8th, we had issued 9.2 million UEPS/EMV cards and enrolled a total of almost 21 million citizens, including dependents. In March of 2013 the World Bank sent a delegation to South Africa to study SASSA's new social grant system and evaluate the potential of replicating such a system in other emerging countries.

As you know, our SASSA contract was challenged in court by AllPay, a previous contractor. We are very pleased with the Supreme Court ruling at the end of March, which had unanimously ruled in favor of SASSA and us on every single count.

On April 18th AllPay filed an application of leave to appeal the Supreme Court ruling to the Constitutional Court, and we and SASSA have objected to the appeal. We do not believe any of the allegations being leveled by AllPay to the Con Court have not been already dealt with it extensively by the other courts. AllPay's previous approach to the Constitutional Court before the Supreme Court hearing and ruling was rejected at that time.

We cannot predict if AllPay's leave to appeal will be granted, or, if it is granted, when or how the Constitutional Court will rule on this matter.

As it relates to the US government investigations, we are continuing to cooperate with authorities. We have produced extensive documents and information to the DOJ and SEC and remain responsive to their requests. I want to reiterate once again that the Company has not been accused of any wrongdoing. We continue to perform under our SASSA contract and we have no reason to believe these investigations will impact our ability to continue to do so.

As a result of these investigations, however, we are experiencing an adverse impact from the damage caused to our reputation including our ability to execute certain aspects of our strategic plan. We have had to devote substantial time and resources to respond to the investigations, which have come at the expense of focusing on certain strategic areas of the business.

Our substantial legal costs are incurred in the US and in dollars and we have to upstream rand at unfavorable exchange rates while also triggering additional taxes in order to meet our obligations. These investigations and the subsequent decline in our share price have also resulted in us being unable to conclude our BEE transaction. We've also been required to expand substantial efforts to attempt to reassure existing and new customers and partners that our business continues to operate normally.

We've also had to respond to certain South African regulators, who have expressed concerns regarding among other things certain product offerings such as insurance, where the Financial Services Board has suspended Smart Card's license -- SmartLife's license due to in our view the US investigation and allegations in the South African media.

In February of 2013 we filed an application pursuant to Section 34 of the South African Prevention of Corrupt Activities Act in South Africa to the South African police. These matters are typically referred to an agency known as the Hawks for investigation. Our application is to identify who may have made corruption allegations that appeared in the South African media after we were awarded the SASSA tender in January 2012.

The Hawks have confirmed receipt of our application and we are cooperating in their investigation. We have also sued AllPay, alleging unlawful competition and are seeking damages. There have been no significant updates on this lawsuit over the last few months.

Moving to our businesses for South Africa, which incorporates CPS, merchant acquiring, EasyPay and FIHRST, micro -- and micro-financing, SmartLife and our Grindrod Bank underwriting contract, is focused on becoming the largest card issuing organization in South Africa, targeting 10 million cardholders, their family members as well as all of the citizens who live in or in proximity of the areas we visit and service on a monthly basis.

It must be understood that via our 800 mobile banking vehicles, we visit in excess of 10,000 pay points throughout the country. We intend to leverage this infrastructure to not only service our pensioners as part of SASSA contractual obligations, but also to service all those citizens who also require a low-cost banking service with all of its functionality, such as our biometric based security, our money transfer system, as well as all associated financial services.

We expect to provide those services in line with our mission, which has always been to look after the best interest of the poorest of the poor and to provide them with formal alternatives to their day to day challenges through a service provider that can deliver on their commitments.

EasyPay is now anniversaried, its customer loss and disposal of non-core transitions a year ago; and signed additional retail customers in Q3 and have began processing for one of the new customers in quarter two.

While the others are still being integrated, our EasyPay system will ensure that we continue to acquire merchants and to conclude agreements with more municipalities and other bill issuers. EasyPay will play an increasing important role in providing our millions of bank customers with value-added services from which we will derive our new revenue streams.

In the second quarter NUETS received written confirmation -- notification from International Smart Card, referred to as ISC, it's partner in Iraq, that it did not intend to renew its contract with us. We have attempted to contact ISC in order to understand the rationale of their decision but have had no success to-date in doing so. We are very concerned at this decision and thus are working very hard to get answers from ISC in terms of their motivation.

NUETS continues to tender for various government or private business in many African countries. Meanwhile, we remain actively engaged with MasterCard in pursuing opportunities for our UEPS/EMV solution in multiple geographies.

Our mobile solution division, which was formerly known as Pbel, has been focused on the integration and streamlining of the various smaller business unit as well as creating strategic plans for VCC, Variable PIN Kiosk Voice Biometric Solutions, the VTU, and our promotional gaming and social networking contracts and opportunities.

We are currently refining the structure and business model we wish to scale going forward for MNOs, financial institutions, loyalty schemes operators and healthcare payment contractors, while implementing our existing projects.

Finally, for KSNET we posted 12% local currency revenue growth. We are encouraged by the better than anticipated growth of our secondary product offerings, namely payment gateway and banking VAN services, which are higher margin businesses compared to our primary card processing business.

To conclude, I am pleased that SASSA implementation is going as well as we planned and that our robust secure online and offline technology has demonstrated its ability to scale rapidly, driving nearly 21 million registrations over the past 10 months. With bulk enrollments substantially complete, we can now focus exclusively on providing best-in-class service to SASSA and the citizens of South Africa.

While we continue to deal with the difficulties caused by legal challenges and government investigations we face, we do continue to see ever greater interest in our overall technological solutions around the world, which, together with our new mobile division and the specific products like VCC, provide us an integrated and comprehensive payment solutions for both the developing and developed world.

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 third quarter of 2013 compared to a year ago. I will also discuss to the extent possible, the financial implications of the implementation progress made related to our new SASSA contract.

For Q3 of 2013, our average rand/dollar exchange rate was ZAR8.47 to the dollar compared to ZAR7.85 and year ago, and negatively impacted our US dollar based results by approximately 8%. The year-over-year comparability of our results for the quarter was impacted by our new SASSA contract in Q3 2013.

On a consolidated basis for the third quarter of 2013, we reported revenue of $111 million, an increase of 32% in constant currency. We reported fundamental earnings per share of $0.05 compared to $0.28 a year ago. Q3 2013 results included $16 million of direct implementation costs, $5 million of smart card costs and a pre-tax $2.3 million provision for bad debts related to our customer in Iraq.

Our third quarter fundamental EPS results were negatively impacted by approximately $0.07 a share due to an even split between adverse foreign tax credits and the bad debt provision related to the Iraqi contract, and roughly $0.05 related to higher implementation and smart card costs.

For additional color, our implementation and smart card costs were ZAR184 million in Q2 and ZAR180 million in Q3 and were therefore marginally higher than we anticipated in February.

We measure the Group's profitability by analyzing operating income and margin by segment. Within our segments, SA transaction-based activities posted revenue of $59 million during Q3 2013, 37% higher in local currency, driven primarily by higher volume and revenue from our new SASSA contract. Our segment operating margin, excluding amortization of intangibles, declined to minus 5% from 23% last year, primarily due to SASSA implementation and smart card costs. We expect segment profitability to improve sequentially as implementation costs subside in Q4, but we will still incur modest implementation and card costs as SASSA had extended bulk enrollment to the end of April 2013, and then a cleanup of any remaining beneficiaries through to June 2013. We continue to expect segment profitability to return to normalized and sustained levels starting in fiscal 2014.

Our international transaction based activities posted revenue of $33 million during Q3 2013, an increase of 27% in constant currency. Segment operating income was negatively impacted by the expiration of the Iraqi contracts with ISC and the related bad debt provision required, and to a lesser extent the ongoing competition in the Korean marketplace, but partially offset by increased revenue contributions from KSNET.

For Q3 2013 KSNET revenue grew 12% in Korean won to $32 million, while EBITDA margin of 25% was down compared to last year but improved sequentially. For fiscal 2013 we expect continued revenue growth in the segment driven by KSNET as well as the increasing contributions from XeoHealth in Q4 of 2013.

Our smart card account segment posted revenue of $9 million, 23% higher in constant currency based on 6.6 million cards from 3.5 million last year. At March 31, 2013, we had issued 8.5 million UEPS/EMV cards, which will be reflected in our April 2013 card base given the one month time lag from when a card is issued and when a typical beneficiary is paid on the card.

For our financial services segment revenue in Q3 2013 declined 22% year-over-year in constant currency to $1.7 million. This decrease in our lending book is consistent with Q1 and Q2 2013 and was primarily due to new rules introduced by SASSA.

Segment operating margin improved to 69% in Q3 2013 from 55% last year. We are not currently able to accurately quantify the head office and shared inter-company administration, operational and overhead expenses related to the segment, and therefore, don't allocate such costs to the segment. For Q3 2013 hardware and software revenue was $8.7 million, 51% higher on a constant currency basis and improved due to an increase in royalty fees and ad hoc hardware sales, offset by a lower contribution from most other major contributors to the hardware and software sales segment.

Segment operating margin was 20% compared to negative 21% last year due to the increased royalty fees and ad hoc hardware sales. Profitability in this segment can vary depending on the timing and quantum of these ad hoc sales. Corporate elimination expense in Q3 2013 includes $4.2 million of legal costs we incurred as a result of the DOJ and SEC investigations.

Our Q3 2013 interest expense decreased modestly to $2 million, driven primarily by lower average debt outstanding during the period.

As mentioned previously and referenced by Serge, we incurred direct implementation expenses of our new SASSA contract of approximately $16 million, which includes cost for 5,500 temporary staff members who were employed for the whole quarter, transportation and accommodation, premises and infrastructure hire costs for bulk enrollment. Our temporary employee headcount has since declined to approximately 3,000 at April 30, 2013, with a majority of the reduction coming towards the end of the month as bulk enrollment was substantially completed.

We also expensed $5 million related to the cost of the UEPS/EMV smart cards issued during the quarter, which is not included in the $16 million previously discussed. Our SASSA contract operating margin was anticipated to be at its lowest level during Q2 and Q3 of fiscal 2013, as this is the period where enrollment volume was at its highest level, resulting in us employing the highest number of temporary staff members, issuing the majority of the smart cards and incurring all the related cost inherent to this massive logistical operation.

We expect our Q4 operating margin to improve sequentially and then normalize in fiscal 2014. We incurred $1.4 million in capital expenditures during Q3 2013 related to implementation. Since inception of the implementation, we have incurred cumulative capital expenditures of $27 million and while there may be some additional expense, we expect this to remain below our prior guidance range of $30 million.

Our total cash outlay through March 31, 2013 has been $96 million for direct implementation expenses, smart card costs and capital expenditures. We would have been in line with the midpoint of our initial total cash outlay range, assuming the volume of enrollments had not changed. As we said in February, the registration of the incremental beneficiaries and therefore the longer employment of our temporary staff should still result in our total cash outlay for the implementation being between $100 million and $105 million.

To reiterate, once we are fully phased-in, we still expect at the very least to maintain our operating income on an absolute basis that we generated from our previous SASSA contract.

At March 31, 2013, we had cash and cash equivalents of $43 million, up from $39 million at June 30, 2012. Cash generated from operations in Q3 amounted to $12 million. The increase in our cash balances from June 30, 2012 was primarily from cash generated by operations, offset by implementation cost and capital expenditures incurred to implement our SASSA contract, a scheduled repayment of our Korean debt and the acquisition of Pbel and SmartSwitch Botswana. We continue to fund the Group's operations and capital investments utilizing our cash reserves and cash generated from our business activities.

The Company's effective tax rate for the three months ended March 31, 2013 was negative 11.1% and is negative as a result of the loss before income taxes and differed from the South African statutory rate primarily as a result of the valuation allowance for foreign tax credits, nondeductible expenses, including interest expense related to the Company's long-term Korean borrowings and stock-based compensation charges and South African dividend withholding taxes.

Our tax rate will fluctuate depending on our intention regarding undistributed South African earnings and the timing of any payments, as well as the final calculation of our foreign tax credit model at our fiscal year end. Our fully diluted weighted share count for Q3 2013 was 45.6 million shares.

Finally, on guidance, we expect Q4 fundamental EPS to be at least $0.20, which includes roughly $7 million to $9 million in additional implementation and smart card costs. Our guidance also assumes the constant currency base of ZAR7.72 to the dollar and our fiscal 2012 share count of 45 million shares.

We did continue bulk enrollment as per SASSA's requirement in April 2013 and subsequently upon completion, reduced our temporary headcount by 2,500 employees at the end of the month. In May and June, we expect to continue supporting SASSA as it identifies non-registered beneficiaries, which should result in nominal implementation expense for the remainder of the quarter.

As of May 8, 2013, we had issued cards to 9.2 million of the 9.6 million grant recipients and enrolled almost 21 million of the estimated 21.6 million beneficiaries.

With that, we will gladly take your questions.

(Operator Instructions).

Tom McCrohan, Janney.

Thanks and congratulations on making as much progress as you have made in such a massive effort in South Africa.

Thanks, Tom.

I was trying to get my hand on how to model -- I am trying to get out year numbers and trying to figure out once things normalize how much earnings the Company can generate. And I just had two questions on that. You reiterated the guidance that the total profitability from the contract, once things are stabilized or normalized, would be similar to where you were previously before the implementation. And I am just trying to get an absolute number from that, because it's bounced around a little bit. So should we be looking at the total profitability in your South African transaction based segment per 2011, which was $75 million of operating profit, or the 2012 operating profit and that segment of $49 million?

Tom, it's obviously dependent on the final volumes that we will see once all the beneficiaries have been registered. So there are a couple of variables that we do need to obviously take into account. But broadly speaking, when we make the statement that things will normalize, we've always said that from a quantum perspective we expect to generate at least the same amount of money or profits -- operating profit in the South African business, and again specifically the pension and welfare distribution business obviously, than what we had before.

And please bear in mind that when you look at the segment results that we disclosed in our previous fiscal years, you should also look at the smart card segment, which is really a subset of the operating profits and obviously the revenues derived from the pension and welfare business.

So if we -- the other thing that you have to take into account when you look at the South African transaction based activity segment is that it includes not only the pension and welfare business, but also the other transaction processes, mainly or most notably obviously the EasyPay business in South Africa. And so we haven't really gone into the granularity of what each of the individual South African business segments generate and we haven't done that in the past. But I would say that the most appropriate way to approach this is to look at our 2011 full year fiscal results.

And if you take the South African transaction based activity segment and you add to that the smart card based segment, you have -- and you back out really what the EasyPay and the other smaller transaction processes contribute to that segment, you should have a pretty good idea of what we are targeting as a minimum contribution towards the next four years of doing this contract.

And in terms of sequential revenue trends within the South African segment and in rand, so stripping out the currency effect, there was a sequential decline in that segment from fiscal Q2 to this current quarter. And given that -- I believe you make revenue based on the number of recipients and the number of recipients is growing. Can you just help us reconcile why you would see a sequential decline in revenue in that segment given the base of recipients is growing?

Sure. That decline is not as a result of the SASSA business. The SASSA business we earn revenue based on the number of cards that are out there and the number of beneficiaries that we pay. That number has been the same more or less since we commenced with the implementation of the contract last year in April. So that's remained fairly constant and we expect it to remain fairly constant going forward.

The big difference really relates to the EasyPay business, which as a transaction processor is obviously subject to certain seasonal trends. So what you would have seen in Q2 specifically with the Christmas and summer holiday period in South Africa that obviously results in higher transaction volumes compared to what you normally see in the third quarter, which is a fairly quiet period, and of course taking into account that in February, we only have 28 days of trading activity compared to 30 or 31 days normally.

So EasyPay and its seasonal trends was really the result of the sequential decline in that specific segment.

Okay, great. My last quick question and I will jump off. What's the status of the relationship or the options that were issued to the BEE consortium that expired? Are you going to reissue options to them or is that an overhang that's just disappeared completely?

Well, the option was at a 12 month period to be exercised. Unfortunately, due to circumstances beyond our control as well as our BEE partners' control, it was not possible for them to raise the required funding to exercise the option, and so regrettably the option expired after the 12 month period. That does not mean that we have abandoned the BEE transaction that we believe is very important and integral part of what we need to do in the South African environment. It is we believe our duty and our obligation to comply with legislation, but also with the inherent underpinnings of what Black Economic Empowerment is all about. And so we continue to discuss possible structures with our BEE partners, including the consortium that we issued the previous option to, and we hope that we can work out a structure that is acceptable to both the Company as well as the consortium members and would have a fair chance of succeeding in the next two to three quarters.

Thank you, Herman.

Pleasure.

Tim Wojs, Robert W. Baird.

I just wanted to echo Tom's comments about ramping the SASSA program that's out there. I guess on SASSA, what would you say is the underlying recipient growth or base growth outside of the ones you are adding for the new contract? But I guess how many are being added per month that are just new beneficiaries to the system?

That's an interesting question. Obviously, there is largely a function of SASSA's ability to process new applications. It's also a function of new beneficiaries joining the system and current beneficiaries leaving the system due to whatever reason. Clearly, there are some beneficiaries who die, especially on the old age grant side. There are cases of course where certain beneficiaries -- former beneficiaries decide not to re-enroll themselves for whatever reason, mainly because they feel that they are probably not entitled to the grant. But if we look at what SASSA has predicted and what they have said as part of their budget in the South African parliament, they expect a growth rate going forward -- once the enrollment process is complete and once the database is properly cleaned up, they expect a growth rate of approximately 50,000 beneficiaries a month.

Net.

Net.

Yes.

Net. So that would be the net growth.

Okay. And then I guess just on Iraq, a couple of questions there. Anything there that you guys might have done differently or any learning experiences that you might be able to share? And then, secondly, how much of the cumulative Iraq revenue did the $2.3 million bad debt expense represent?

On the first -- and this is Serge. I apologize. I got the flu. What we are trying to find out at the moment, and we have not been able to find out, because we have not been able to have a -- what I would call is a proper communication with ISC, is to find out the underlying reason for the decision not to renew the contract. Now obviously there's lots of innuendos. And I don't know if you follow a lot of what's happening in Iraq at all, but obviously we do. And there appears that there is a lot of new initiatives with the US that are actually taking place in Iraq as we speak.

There also appears to be a number of sort of evaluations that is also taking place and there is also been I think a few allegations of corruption in Iraq as well vis-a-vis some of the ministers. So at this point in time we really do not know if the decision to discontinue the product or discontinue the system was something that was made at the government level and for what reason it was made. If it was purely a fear of what's happening to us on the worldwide basis, specifically the DOJ investigation.

And obviously we want to get to the bottom of this, because as far as we were concerned or as far as everybody was concerned -- and the last bit of information I received from Iraq everything was working to the satisfaction of the customer, certainly to the satisfaction of government and certainly on our systems we could see the transactions were growing, in fact a rapid, rapid pace.

So there is something that's obviously gone wrong. We haven't been able to put our finger on it. Iraq is not a place that we travel to on a regular basis. But I know that Herman is working with a number of other firms. They focus on -- or can focus on Iraq, both in terms of getting, let's call it, information from the ground. But also more importantly, in also looking at recovering the debt that we have incurred, which, by the way, is probably the debt of 2 and above million dollar, which probably is around the five months -- it's probably a five or six months period.

So we certainly have not given up in either talking to ISC and we have not given up in obviously recovering our money. We are normally not very good at losing money for no reason. So we will certainly keep everybody informed once we get what I would call is validated information. And at this point in time, our best efforts have failed to give certainly me any answers that we can relate to any of our share holders.

Okay. And then just a couple of modeling questions, I guess what should we expect for the normalized free cash flow and the normalized tax rate going forward? And should we see this partially hit in Q4 and then really see a full normalized quarter in Q1?

I think Q4 will be somewhat impacted by the additional month of enrollments that we had to do in April as well as bit of the cleanup processes. Obviously, we will see the full impact of the final tax rate in Q4. That's a conversation that we are happy to have with you offline, simply because it's obviously quite a complicated set of calculations that needs to be completed. And there are many factors that can impact what the final rate for the year will be.

But I think if we focus forward on Q1 of 2014 and really the whole of 2014 going forward, we believe that the cash flow that we should generate would be more or less in line with the normalized fundamental net income number. CapEx will obviously return to its normal level that we saw in 2011 or thereabouts of $4 million to $5 million a year -- sorry, a quarter. And if we then assume also that the tax rates will be normal and that we won't have any leakage as a result of South African dividend taxes, so 36% to 40% is what we have traditionally seen in the past. We should have normalized cash flows that approximate whatever the result is of your calculation that produces the fundamental net income number.

Okay. That's helpful. And then just on the hardware and software segment, I know that can be volatile or lumpy. But are you expecting that to decline a little bit in Q4 or stay around Q3 levels? I am just trying to figure out what I should think about for Q4 hardware and software relative --

Looking at what's in the pipeline now, and it's again slightly more difficult to say exactly when some of the deliveries will take place simply because we are also at the mercy of shipping dates from some of the locations where the terminal -- the cards are manufactured. And some of those haven't been confirmed yet. But if we look at what we anticipate in the pipeline, I think our conservative assumption is to assume that it will remain flat sequentially. And hopefully -- obviously in a more optimistic view could improve in Q4.

Okay. Well, thanks and congrats on the ramp and, Serge, hope you feel better.

Thank you very much.

Thank you.

Kevin Tracey, Oberon Asset Management.

I guess first of all, Serge, you mentioned that there was a study ongoing in South Africa, basically trying to figure out if your technology can be applied in other emerging countries, and I guess I missed who was conducting that study. And I was hoping if you could maybe give explanations of a couple of specific countries that you think your technology would be applicable to and I guess what the existing method of giving grant payment in those countries is today?

Yes, sure.

The World Bank actually came to South Africa in order to meet with SASSA and spend, as far as I can establish, a couple of days with them, two or three days with them, to actually have a look at what we managed to do here, between obviously SASSA and ourselves. And also how we have managed to integrate the MasterCard brand into all of this in order to make sure that the systems would become interoperable with, let's call it, first world infrastructure, which we have plenty of in South Africa in the national payment system.

This was I think what triggered the initial investigation, simply because people were a little bit -- to some extent a little bit amazed that in fact this could be achieved, whereby these very precise, very detectorial systems, such as, for example, the MasterCard or Visa solution, could somehow be used with a very flexible UEPS system at the same time in order to be able to fulfill two main functions. The first function of course is the function of payment, and people have been able to pay and buy and use the card any way and for anything.

But on the other side, to be able to have the same card that would be able to monitor, manage, control and secure a system such as the national, social welfare system. And that's what was intriguing a lot of people. Now as a result of this -- I think it was achieved because it has got an impressive actually thing to see. I mean, I know from where you guys are at, it doesn't look like much. But when you have hundreds of thousands of people or millions of people that are getting paid through the system at any one point in time and paid without any flaw, without any queries, offline, online, rural, urban, pay points, ATMs, first world, third world, whatever you want to call it, it's actually quite impressive to see it work. And I think that made a big impact not only on the World Bank, but certainly on MasterCard as well.

And I don't know -- in fact it was an article that came out which again says that MasterCard is repeating or attempting to engage in Nigeria, right as we speak, as a pilot to do exactly the same thing, for example. And as you know, Nigeria is probably -- if any country should be looked up to, we should look at -- Nigeria is one of them, because it happens to be the most populous country in Africa.

So I think this is all giving us a lot more energy and a lot more visibility and a lot more credibility. And then when -- your question was, where else can we use it. Well, to some extent the beauty is that the world is made up mainly of third world countries, not first world countries. So -- I know a lot of them don't want to call themselves third world, but maybe the second world. But when you look at Mexico, when you look at most of South America, when you look at the whole of Africa, a lot in the Middle East and when you start moving into India and you start going into China, Indonesia and countries of this nature, which probably gives you 4 billion to 5 billion people.

That's where the technology is the most applicable. And without the shadow of a doubt we know that before we did SASSA and before we managed to do the EMV/UEPS solution, it was incredibly difficult for one of our executive Brenda Stewart that was selling UEPS, to sell UEPS in countries without this EMV component, because you are always dealing with banks. And as you start dealing with banks or government, banks tend to look at things on the worldwide basis and so Visa, MasterCard are the standard. So if you can't be with Visa, MasterCard, if you can't interoperate with them, we don't want it -- although we want the functionality.

We have broken that barrier down and that means in my view that we should with the assistance of people like MasterCard, we should be able to penetrate these bigger markets far quicker without having pushback from the traditional banks simply because the systems were not compatible with Visa, MasterCard. They now are and therefore they can have the best of both worlds, and I think that's really the opportunity that presents itself.

Okay, well, great. And then I guess just to be --I guess clarify or be clear, now you say MasterCard is engaged in Nigeria for a similar solution. Now -- I guess have they communicated to you that they want to do so in partnership with UEPS Technology? So I guess that's the first question.

And then, secondly, you said that you are participating in a number of tenders elsewhere in the world and I guess I am wondering in any of those ongoing tenders I guess first have any kind of concluded and has there been results of you winning or losing? And in those tenders are you doing it in partnership with MasterCard as you are in South Africa?

Well, there is no doubt that we -- I know already of two projects which have been MasterCard initiated, but we are waiting for the tendering parties to make a decision. Certainly, they have been out here, where they have visited us. We have showed them the technology. They were very excited about it. That doesn't mean they are going to do it. But we feel quite confident that there is a good chance that they will like the solution simply because it does all the stuff that I have just explained.

The Nigerian thing is new, something that actually popped up yesterday and this morning. And we in fact spoke to MasterCard a little while back, just to say to them, "Well, what's going on?" And they say, no, no, at the moment they are trying to incorporate the Net1 technology into something. That's been going on in Nigeria with them for quite a while. And you know sometimes people go for -- they go for the solution, but they know the solution is not complete. And I think this is adding to the MasterCard sort of quiver for them to be able to say, "Well, now we can actually make that solution with Net1 even bigger or even better than what it was in the past."

We have no reason to believe at this point that MasterCard will not push or will not use our solutions in the countries where they know our solutions are in fact needed. You know as well as I do that in most developing economies the penetration of MasterCard and Visa is insignificant. We are talking about a few percent of the population have got these types of cards.

Currently, when you think so many -- so few are banked anyway. But suddenly you are able to basically pretty much do what we have done here, where 10 million people are becoming banked and 10 million people have a MasterCard, while before that none of those people had a MasterCard. And most of these people should not have been or would not have been banked. And that's I think the opportunity for us. But also I think it's a great opportunity for MasterCard because they should be able to deploy far more, hundreds or thousands or millions more cards than they would have been able to do otherwise.

Alright, okay. Okay, great. And then I guess the quick question on the implementation cost going forward. Now I think on the last call you mentioned that you expect to retain about a quarter of temporary employees, and I know that number has kind of moved around. So I guess the way to ask the question is, now you have estimated $7 million or $9 million of implementation costs in the fourth quarter as you kind of wind down I guess registering everyone. But in the first quarter, I guess can you give an idea of how many --- I guess what the quarterly run rate of these implementation costs you break out today are going to I guess stick with the Company going forward or how many of the -- how much of the $7 million to $9 million will (inaudible)?

In terms of employees, if we compare what we had by way of temporary employees at the peak employment period, which was really the second and the third quarter, and where we expect to end up in fiscal 2014 once everything is done, the net movement or increase in our staff numbers if we look at what we had in 2012 compared to what we will have in 2014 will probably be 1,500 employees in addition to what we had before.

So those would be people that obviously we need to start up the four new provinces that we now have and we didn't have in terms of our previous contract, and obviously also to assist with the higher volumes of people that we've had. So the 5,500 employees, the temporary employees that we had to hire as a result of the implementation, we will retain 1,500 of those and 4,000 of them were on temporary contract and those contracts have largely come to an end.

Okay, understood. And then, lastly, Serge, so when you can give an update on the mobile virtual card? And I know -- because I noticed that the performance goals had been reached for I guess PBel company that Net1 bought recently.

And I guess I am wondering if you could maybe explain a little bit how that enhances the mobile virtual card position going forward?

Look it's -- we can spend quite a bit of time on that obviously. But in a nutshell, we have -- as you know, we have been sort of committed and we believe strongly that one of the parts of our solution has to be mobile. And obviously, as you know, mobile wallets today are about dime a dozen, but none of them really have been hugely successful, at least in my view. Because a lot of them are really wallets; they are not even payment instruments.

We have focused on providing a -- for lack of a better world -- a means of being able to generate one-time credit cards on the phone, and that particular app can be linked to any existing or any new mobile wallet that anybody may wish to have. So we are not trying to get into the space of the mobile wallet. We are trying to say, we have got something that does not require all of the issues that are currently trying to be solved by people like NFC and people by having secured tokens on card.

We know that we don't need any of this, but that we can provide this particular payment instrument to anybody that has a wallet and wants to use it to do whatever they want to do. And it can be used on its own at the same time. And that's what really Phil's Company is all about. Their job is to develop the top of apps on phones, not necessary just to have the sake of the app, but for the app to actually have to make use of a particular payment instrument in order to be able to pay for the goods that are purchased, and to do that of course in a completely secure manner. And to be able to do it on any site, anywhere in the world without having to ask others for permission or to have to develop new software or to have to add new payment instrument to a particular Internet site.

That's really what we have done. And at the moment, we are starting to get, we believe, some very, very good traction from some of very large players that they've seen our thing in the light to be able to say, "Hang on, I know what we were trying to do." But we missed this extra little element of a year to make sure that this product becomes a dramatically interoperable on anything that currently exist rather than to reinvent the wheel.

So in a nutshell, that's what that company is really focusing on for the moment and a number of other of our patents, which includes voice and all sorts of other things.

Dylan, we have time for one more question.

Well, that's all I have. Thank you so much.

Thank you.

Mark Heilweil, Spectrum Advisory.

Serge, congratulations on all the achievements that your Company and your people have managed. I am a bit annoyed as an American citizen about the Justice Department and I think at the SEC. And I have drafted a letter to my senators and my congressperson complaining about the use of Justice Department's services on this matter. Would you object if I send this? Or, do you think it will do any good or should others send it?

You know I could not advise you on this if I tried. We were probably as shocked as you were when we received the -- for lack of a better word -- the questions by the SEC. And candidly we are still very much in the dark as to try to understand how the Justice Department works in the United States. It's very, very unfamiliar to us and to the way that we proceed with certain courts in South Africa. So I am probably the wrong guy to ask. But like you we certainly are somewhat confused and sometimes even upset about the fact that we do not know how to expedite and finalize this particular investigation and to do it in a way that is not going to be costing our shareholders a $1.5 million a month, which is what it is costing us at the moment. More than that, you know how much time it's costing management.

Of course. Exactly.

And the worst thing, I will be honest with you, is that when we deal with a customer -- there was a gentleman that talked about the hardware sales. We have got a big customer that was looking at buying probably 60,000 terminals for us. Now you cannot blame that customer from saying, "Hang on guys, we are not going to give it to anybody else, but we are going to put it on hold a little longer because we still want to make sure that at the end of the day there is nothing funny going on here."

So we no longer know if some of our customers are moving away from us because of this investigation, because they don't know what they don't know. We don't know if new customers are not signing or not accelerating because they would rather wait until something happens. But they don't want to upset us, so they don't want to tell us that's the case.

So the whole thing is, I can assure you, incredibly -- it's been incredibly frustrating and incredibly difficult. And I -- personally I am asserting no objection. I am sure that in the United States everybody is free to do whatever they want. So I don't see any reason why you shouldn't write a letter to anybody you wanted.

Okay. Well, I see your frustration. And the one having some familiarity with our bureaucracy is I would advise that they act very slowly and try as much as possible to preserve their prerogative. So unfortunately, unless somebody looks into this misuse of resources, I think that this thing could go on for a while.

This is what worries me.

Yes. Bye-bye. Thanks again.

Thank you.

Thank you. Dylan?

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