Ladies and Gentlemen, good day and welcome to the Net1 Second Quarter 2012 Review Conference Call. [Operator Instructions] Please note that this conference is being recorded. At this time, I'd like to hand the conference over to Dhruv Chopra, Vice President of Investor Relations. Please go ahead, sir.

Thank you, Harry. Good morning, and good afternoon to our investors around the world. Thank you for joining us on our Second Quarter Fiscal 2012 Earnings Call. With me today are Dr. Serge Belamant, our Chairman and CEO; and Herman Kotze, our CFO. Both our press release and Form 10-Q are available on our website 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 analyzed our results of operations in our 10-Q and in our press release in rand to assist investors in understanding the underlying trends of our business. As you know, the company's results can be significantly affected by currency fluctuations between the U.S. dollar and the South African rand. With that, let me turn the call over to Serge.

Thank you, Dhruv. Good morning to all our shareholders. I'd like to begin with an update of the key trends in the business, before I will hand over to Herman, who will discuss our financial performance in more detail. I'm very pleased with the momentum in our second quarter 2012 results. We reported revenues of $92 million, which is a year-over-year increase of 3% in U.S. dollars and 22% in constant currency. Fundamental EPS for the second quarter 2012 was $0.39, up 2% in dollars and 20% in constant currency. We posted modest growth in our pension and welfare business during the second quarter of 2012, driven by double-digit increase in our rural acquiring business and operational efficiencies on the cost side. As of December 31, 2011, we have $81 million in cash on the balance sheet bringing our net debt position to $25 million. Operating cash flow during the quarter was negative $6 million, which is consistent with the seasonability of our cash flows given it usually takes payments made in the second quarter. This quarter, I will deviate slightly from our regular communication strategy and focus my discussion on our largest businesses, key developments and overall corporate strategy. As a reminder, our core established businesses, which include CPS, KSNET and EasyPay, together in quarter 2 2012 accounted for approximately 82% of our revenue, as well as a majority of our profits today. These larger and more mature businesses either are or have the potential to generate at least double-digit growth consistently over time. The second subgroup is our growth businesses, which are smaller. But in our view, have the potential to grow the rate materially faster than our established businesses over time. This group, which is also strategic in nature, includes Net 1 UEPS, MediKredit and FIHRST, and…

Thank you, Serge. I will discuss the key results and trends of our significant operating segments for the second quarter of 2012, compared to the second quarter of 2011. As Serge mentioned, I will also discuss the financial implications of our new SASSA contract, as well as explain the recent change in South African tax law. My discussion will be based on our results in South African rand, as this provides the best indicator of the group's actual operating performance. For Q2 of 2012, our average rand-dollar exchange rate was ZAR 8.18, compared to ZAR 6.94 a year ago and negatively impacted our U.S. dollar base results by approximately 18%. The comparability of our financial results for Q2 2012 was impacted by the inclusion of KSNET for a full quarter and our Eason acquisition. On a consolidated basis, for the second quarter of 2012, we reported revenue of $92 million, an increase of 22% in constant currency and 3% in U.S. dollars. Fundamental EPS year-over-year was flat at $0.39, however, in constant currency, it increased 20%. We measure the group's profitability by looking at operating income and margin by segment. We recorded a tax benefit during Q2 of 2012, as a result of a change in South African tax law. The change has been expected for a number of years, and primarily impacted the way that we report our income taxes. On December 20, 2011, there was a change in South African tax law to impose a 10% dividend withholding tax, a tax levied and withheld by a company on distributions to its shareholders, to replace the 10% STC release which was a tax related directly on the company on dividend distributions. As a result, the company has recorded a net deferred taxation benefit of approximately $20 million in the…

[Operator Instructions] Our first question is from Dave Koning of Baird.

My first question just revolves around -- the last 5 years and so, there's been so much focus on this contract that I know its probably been quite distracting internally. Is this really free up now the next 5 years with your ability to go out and have many more conversations with other countries of other institutions? And have you -- are you already seeing progress on that front?

It's Serge here. Actually, your question is a very, very good one, a very valid one. And I think very few people and obviously, it's understandable, if you do not understand the amount of management bandwidth that we have spent over the last many, many years to arrive at this junction, where we are now being appointed as the basic international welfare payment instrument for SASSA. And you are quite correct in stating that I would think that over the next 6 months or so, the bandwidth that we have spent in focusing on SASSA will now be moved down to a next level of management where, operationally, people are going to start getting involved with this particular project and really make it work and try to optimize our investment and try to rebuild or build our margins which, obviously, is not going to be taking as much of our time as it used to do in the past where we are really trying to work out what we should do to convince SASSA that in fact, we are going to be the right company to facilitate these payments across all of the country. So there is absolutely no doubt that our focus, apart from obviously delivering on SASSA, is now going to be focusing on the businesses that need our attention, could do with the attention and certainly the businesses that we believe can grow the company at a much, much faster rate. During my little discussion or speech, I did mention VCC which, personally, I still believe is something that can grow at a substantial rate, I think there's a demand for that worldwide. And currently, I haven't seen anything that remotely looks as interesting, as secure or as simple to use as ours. So that is something that we certainly want to spend a lot of time on. I think XeoHealth is something that we wanted to experiment within the U.S. -- is a very difficult market and we've been very successful very quickly by signing 3 contracts. And that is something that is showing huge amount of potential, not only in the U.S. but elsewhere. So to conclude, there is absolutely no doubt that during the next 2 to 3 years, we intend to ramp up either businesses and opportunities in South Africa and outside South Africa at a much greater pace than what we've done in the past.

Great. And then just one follow-up. You mentioned how EBIT will likely be a bit stable under the new contract. But separately, I guess, from the core contract with the government, you're going to have 3x as many cardholders. Would you expect just all the services around having those extra cardholders to generate kind of meaningful incremental revenue? And I guess, kind of a corollary to that question is just, the next 2 years, obviously, there's a lot of cost going in to ramping the contract, but did you have kind of a goal out there for fiscal 2014? I'm just throwing a number, but like maybe $2 of EPS by 2014 if some of the new revenue streams kick in and just kind of looking at long-term profitability goals?

I'm not going to answer the financial question because it's Herman's department. But if you -- and perhaps I haven't been that clear in my -- and it's very difficult to put it in writing. But I think I read clearly in your question that you've obviously understood the power of having to deploy a payment infrastructure across all of the 9 provinces of South Africa. And at the same time, to have the power of having indirectly because, after all, our beneficiaries are SASSA's customers, but they are also, to some extent, become ours. And there is absolutely no doubt that having 10 million customers, which is more or less 20% of South Africa's population must give us a massive opportunity. Not necessarily to try to sell products directly to people that are poorer, but certainly, to utilize the infrastructure that you need to pay grants to those beneficiaries in order to lock up many other customers that can deliver would be able to use the same infrastructure. And for us to target those customers with a range of other products as well. So there will be, without a shadow of a doubt, on an equal playing field basis, there is no reason why our 10 million pensioners should not be able to buy products from whoever they want, including us. But more importantly, I think the real money, in my view, would come out, out of the customers that are not necessarily beneficiaries. That are going to want to use the same functionality that we are providing to beneficiaries, simply because it is safer, faster and better than anything out in the market today. And I think that's really where the game plan is going to happen. So I think in a way, reading between the lines and reading your question, I think you've probably read it correctly in terms of what could be a potential upside for us in the South African market.

It's Herman. You have a question you asked regarding our long-term profitability goal. Obviously, we intend to increase our profitability in the long-term, it goes without saying. And the fact that we will have this expanded infrastructure once established, obviously, will make it a lot easier for us to do so. I think a key takeaway point is that the infrastructure that we're rolling out, now that we have a EMV stroke UEPS card, obviously, implies that their infrastructure is accessible not only by our own cards, but by other EMV cards as well. Which obviously creates a state of opportunities for us to derive additional benefits from it. And if we look forward to 2014, obviously, it's difficult for us to put our goal out there like $2 a share, whatever the case may be. There's simply too many variables including the exercise of the options or not. That, obviously, would have an impact on the share count and the EPS calc in itself. But our long-term goal, I think -- our medium-term goal is to simply maintain the quantum of the absolute quantum of the operating profit that we've generated in the past from this contract. And we, obviously, have a plan to convert the national infrastructure that we will build and all the facilities that will be at our disposal into a higher earnings power by 2014.

Our next question is from Eric Almarez of Apis Capital.

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

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

You guys talked about your average price per beneficiary per month of, I think, around 16.5 and -- including and VAT and around 14.5 without the VAT. I think the rough math on the existing business today is something in the mid- to high-20, so the price is falling quite a bit. Do you think that the existing business, the existing beneficiaries that you serve, will those continue to be profitable under the new contract? Or are you going to see something more like a loss there in order to recapture those new urban beneficiaries that may be more profitable?

Yes. I think the way to think of that is that our current beneficiary base of 3.2 million, sort of cardholders. We, obviously, will continue to serve those as we have over the last 8 or 10 years in most provinces. What we need to understand though is that we are reissuing cards, new cards, to all 9.6 million beneficiaries. So we will have to incur the costs of issuing new cards even to our existing cardholders. And while those provinces should be on a stand-alone basis, more profitable for us than the new ones that we have to service, we still have to reinvest quite a substantial amount of money in upgrading our infrastructure in these provinces where we were before. Simply because we've run that infrastructure for the last 8 to 10 years in some cases. We've, obviously, been anticipating an outcome to this tender award for the last 3 years. And we've been very careful in the amount of investment that we've made. Now that we know what it is, we obviously plan to make sure that we modernize all of our existing points, in addition to modernizing or incorporating the new areas into what we do. And I think the other thing that one has to keep in mind when you try to work out the relative economics of this contract, service delivery in the rural area, which is predominantly where we are today is, from an operational expense point of view, traditionally, a lot more expensive than it would be for us in an urban area. So as we rollout the urban areas, these are the initial startup costs that we have to incur. But traditionally, the distances that we have to cover and the volumes that we serve are much greater at a specific point. So there are pros and cons to the new areas that we will get, there are pros and cons to the existing areas that we have. But obviously, we believe that when we take a blended view of the rural and the urban areas, we should be able to at least maintain the quantum of our operating profits.

What do you think the relative cost is for beneficiary? I mean is it like 1/2 the cost in the urban versus the rural, or some order of magnitude different from there?

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

Our next question is from Daniel Baldini of Oberon Asset Management.

I have 2 questions related to that contract. It mentions in the 10-Q that a couple of losers are disputing the award. And I'm wondering if you could describe what the procedure is for, I don't know, adjudicating these disputes. And then the second is, the term of the contract is 5 years and you're investing, I don't know, $50 million of capital to fulfill the obligations under the contract. And do you anticipate getting an adequate return on that capital invested over 5 years? Or are you assuming that profits would be generated beyond that in order to provide an adequate return? And part of the reason for asking that question is, there is an article back in June in Business Day talking about SASSA. And it mentioned that Virginia Petersen, the CEO, commented, at some point, that the agency itself planned to introduce an automated system of grants payments 5 years from now. So that implied to me that there is a possibility that this whole thing could revert to the government at the end of this contract.

These are 2 very, very good questions. The first one, one, it's not surprising that you called them the losers. So I didn't say it, you said it. But in a sense, if we had lost it, we will also be called the losers. And we probably will also go to court. We're talking about sizable contracts here, both financially and in terms of profitability and in terms of image. So there's absolutely no doubt that I think 1 or 2 companies or 3 companies will definitely go to court and they're going to follow the normal legal process to try to get information in terms of how was this contract awarded? What processes were followed? Did SASSA follow the correct procedures? And from our point of view, we're not SASSA, but certainly, we believe that everything that was done, was done with the highest form of integrity. So all it, yes, they will be going to court, there will be people that will try to get other information or injunctions or try to sort of just scuttle the project or delay it or whatever the case might be. What I'm really, personally, and I'm not an attorney, but I'm really not that concerned about what we have seen, that there is any real effects or evidence in their attacks that can be possibly taken seriously by anybody. And of course, I would say that. But certainly, I can comment on some of the technological areas that were sort of talked about. And from that point of view, I know that there is absolutely nothing that can be attacked in terms of what we can provide. So they'll follow the normal course, we will have, unfortunately, to spend quite a bit of time defending these because we will be automatically…

It does. If I may, can I ask 2 questions about KSNET. The first is, did you say that for Q2 the revenues were USD $28 million with a 28% EBITDA margin?

Correct. $28 million and 27% EBITDA margin.

27%. Okay. Great. And my second question is in the 10-Q, you mentioned a couple places that you got $4.9 million from the sellers of the company. And the words are, "in final settlement of any and all claims and contractual adjustments between us and the former shareholders." I'm just curious, did you have claims against the former shareholders or is this sort of a release from Escrow or something?

It's really a combination of these things. In any major acquisition of this nature, obviously, there is an amount of money that goes into Escrow and that's supposed to cover, during a period of time, any claims in terms of the warranties provided. There was also a very specific -- a working capital adjustment provision in our agreements with the sellers. And over the last year, we've been working through the issue that we identified after we took control of the business, both from looking at the warranties provided on the one hand and calculating what the working capital adjustments could be. There were certain tax issues that were also -- that needed clarification. And finally, in November, we reached an amicable settlement with the sellers. And the net result of that was a payment of $4.8 million net to us. So net of the working capital adjustments, net of the tax liability claims, et cetera that we had. And so going forward, the acquisition of KSNET in terms of determining the purchase price and any claims or counterclaims that may exist is now terminated.

Our next question is from John Zaro from Bourgeon Capital.

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

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

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

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

Yes. I didn't know how often they exercise them. And is your contract with SASSA transferable? i.e., if someone were to come in and try to buy you or you were to sell yourself, could you transfer that contract in 5 years?

You mean at the end of the 5 years?

No. During that 5 years?

During the 5 years.

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

My view is, right now, that at this point in time, any change in ownership would certainly would have to be looked at and agreed to by SASSA, not to create any real impediment. South Africa works very much, not only on the subject basis but they work as...

Yes. We've watched that for 5 years, I know exactly what you're talking about.

All right.

Okay. And then the last thing which I asked you about last year. And now that you've got this settled, there's obviously a lot of work to do and a lot wood to chop to get this thing done and it's going to be pretty massive. I'm assuming that you had some planning, but you didn't have total planning because you didn't know if you were going to win all of them or some of them? The question is with all these other things that you're always talking about that you'd like to do, and part of your earlier conversation, do you have too many things that you're trying to focus on? In other words, we have this one that finally we've all been waiting for to get some sort of finality to. Now we're trying to shoot for let's get it accomplished and make sure it works and you make money, and let's try to make money somewhere else. Do we really need to have all these other things that we have? I mean, I love the fact that you're so excited about all these other things, but I mean, you can only do so much.

I think your point is valid and is something that was discussed at the last board meeting a couple of days back. And there is no doubt that we're going to have a good look at -- or review all of the different businesses we have. And when we got in to these business there was a reason, obviously, at a time. We have to review from time to time if those reasons still apply after the event of SASSA. There is no doubt that anything around South Africa, SASSA, EasyPay, the banks, the insurance company, all of that were always part of the same puzzle anyway. So that is going to become, for lack of a better word, one picture. And then it's more a question of reviewing what do we intend to do internationally? What products do we want to really focus on? Where do we really believe that we can spend time on growth, for example, like VCC, which I mentioned before is my own little pet. And that's something that, personally, I want to pursue anyway. But you are quite right, that there may be 1 or 2 other of our businesses that we might look at and simply say, "They're old-fashioned and they're not cool." And that we certainly do not want to stretch either our resources financially or our management bandwidth chasing something that we might have made a decision 2 or 3 years back. But today, that decision we wouldn't make it again, knowing the fact that we now have the SASSA contract bedded down. So I think there will be, in my view, a few changes taking place over the next couple of months.

Our next question is from Leonard DeProspo from Janney.

I just had a question with regard to the incremental beneficiary given that the ones in urban locations will be more profitable than rural.How do you see the breakout of those incremental beneficiaries? I mean, the 6.5 million new ones, is that going to be more heavily weighted to urban versus rural or vice versa? I mean, just any visibility you can give us there.

Once again, that's another good question. We know exactly today what is rural across all country and what isn't. So for us, if we're looking at -- let's call it 10 million, although it's not 10 million, I think it's 9, -- at the moment, it's 9,763,000 something like this. And by the 1st of April, of course, it will be slightly over. So let's call it $10 million. I would think, right now, at the rough rule of thumb, if is we say that 5 million likely to be remaining rural or semi-rural and the other 5 million are going to be more urban. Now sometimes people call urban because you happen to be within a city, but you can be living in Johannesburg. And if you happen to live in Soweto you're really urban, but you're really rural. Because Soweto is a rural area inside an urban area. So the beauty of the technology and the product that we've now got, is that it doesn't really matter because it can be used in one or the other. The question is how much more money do we have to spend because it is rural rather than it is urban. And Herman talked about between I think you said USD $40 million to USD $50 million. Obviously, a lot of that money is actually going towards developing rural pay points. Now what we must understand here is that rural areas in South Africa are actually quite large. And developing rural pay points, like we used to do before for the sole purpose of paying beneficiaries, was at very, very high-cost. With the new technology, with developing rural pay points, of course, to pay beneficiaries. But also, to be able to provide services to people that are not beneficiaries. Which means,…

Okay. Just one more question to make sure I heard correctly. It sounds like you're mandated to have this program rolled out by the September, October time frame, but you're going to shoot for a mid-May launch, did I hear that correctly?

Well, the main launch has to be the 1st of April. And we have -- it's a duel launch. And that was what's happening on the 1st of April, as we said we've got to do a hybrid system in order to ensure that we can replace our existing competitors completely and basically remove them from the market, because otherwise SASSA would have to negotiate some form of an extension with them. And that will take about 1 month to 2 months, let's call it, April and May. And 1st of June will be what I would call is the proper rollout of the new technological platform, and specifically the new biometrics smart card. So from 1st of April, we are taking over the entire payment of all beneficiaries in South Africa, regardless of how they are currently being paid.

Our next question is from Steven Wu [ph] of Alliance.

Given what you just said and your comment on trying to be core and focused. How should we view the Korean transaction when it seems like it's sort of really out there, but the SASSA contract is so much more exciting and significant and prospective? I wonder if you can comment on that.

Well, once again, like I said this is a very, very good question. We always saw Korea as, for us, the gateway to, let's call it, to other countries around that area of the world. And we certainly did not know how we should try to attack those territories. So for us, the Korea acquisition generated many things. One, it was diversification against the rand, diversification against the actual country itself, country risk. And it gave us an income in a currency which as you know is very, very strong. Korea have been actually quite -- more than just simply a developing country but basically reaching first to a country status. So for us, that was the idea of the Korean switch. If you look at purely the Korean business, which today is really, for lack of a better word, is really a switching business. It's certainly taking transactions between merchants and banks. There is absolutely no doubt that we all know that the pressure on margins on those particular business is very high. We're experiencing the same thing with EasyPay. So there is no doubt that unless we're going be able to refocus the Korean business, to doing the type of thing that we are doing here and doing it in a different way and creating new avenue for high-level or high-margin businesses, we probably would have to review and just say, "Well, hang on. Is this something that we want to spend our money and management time on?" So certainly, this is one of the businesses that we are -- we believe is doing very well and is growing at a fast pace. But like any of our other businesses, except for CPS, is something that we will be keeping an eye on in order to make a decision going forward.

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

We very much hope so.

Our final question is from Sean Cain [ph] of Morgan.

I've been on board with you guys for about 10 years and it seems like over this timeframe we just have SASSA overhang. We've lost a lot of attention in the investing public. And I'm just wondering what if any marketing efforts you guys are going put forward to make Net1 a household name, number one. And number two, what are the strategic plans have you all considered to unlock shareholder value? And then lastly, now that the SASSA deal looks to be -- soon to be behind you, what is going to be your next big focus? I mean, you didn't comment on Iraq at all or any of the pilot programs or spare bank [ph]. What is going to be the next big target-rich environment for Net1?

I'll try to sort of answer all of these in one go, if possible. I think, one, the SASSA thing for us is the real watershed. Like for many of our investors as well that probably had lost a lot of patience, for lack of a better word, and also, probably, realized that in fact, the investment was not getting the return fast enough from the timing point of view. Unfortunately, there are certain things you can do and some thing you cannot do. Now we've put that behind us, which I think will buy us back the credibility that I think we've always deserved, to be quite honest. But more importantly, we've just mentioned that this particular contract will, without a shadow of a doubt, I believe give us what we need to move into the African continent. And also to move into other developing areas, the South America being one of them. And the intention is certainly to make sure that we can take the same solution and offer it to many other places. I believe that with our new black environment partners, there is absolutely no doubt that, that has already been in the table. And this is where we see a lot of the growth taking place in the type of similar business in other large countries. When I say large countries, countries with a large number of people. And all we would have to do is to penetrate or to hit 1 or 2 of those countries and candidly, Net1 will be in a different position and on a different scale. That's without even mentioning as I say 1 or 2 other critical businesses, which I also firmly believe, will and can get Net1 into a different bracket of return for shareholders.

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

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

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

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

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