Lesaka Technologies, Inc. (LSAK) Q3 2012 Earnings Report, Transcript and Summary

Good day, and welcome to the Net1 Third Quarter Review Conference Call. [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, Dylan. 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 U.S. 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 beginning 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 doubt that you are all aware that we have commenced the rollout of our SASSA contract, which became effective on April 1, 2012. I'm very pleased to report that we have almost completed our second month of registrations and payments and that our technology core solutions have proved incredibly robust, effective and reliable as well as 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 USD $0.28, down 18% in constant currency. Pension and welfare revenue was flat in quarter 3 of 2012 as we opened the April pay file in the last 6 days of March but received the new lower pricing for those beneficiaries. KSNET grew 15% in local currency. Merchant acquiring was up 16% and mainly created in FIHRST, improving momentum. As of March 31, 2012, we have $88 million in cash in the 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 our discussion on the implementation of our SASSA contract as well as the review of some of our key businesses. Our core established businesses, which include, as you all know, CPS, KSNET and EasyPay, together in quarter 3 of 2012 accounted for approximately 83% of our revenue and a majority of our profit. 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 began the distribution of social grants to approximately 9.2 million beneficiaries across all 9 of the country's provinces. The contract would take effect on April 1, and we have now disbursed grants for 2 months under the new contract. Our implementation schedule is 2 key phases. The first one, as 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 process and issuance of cards, we hired approximately 2,200 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 an excess of 4 million beneficiaries through electrically transferred into existing banking accounts and approximately, an additional 5 million beneficiaries at our 11,000 pay-points and at participating merchants, other merchants and ATMs. We have also already opened in excess of 1 million new bank account at Grindrod Bank, with whom we have a long-term technology core 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 ballot during the month of June. Once the system has been fine tuned, a decision will be made by SASSA and us as to the final timeframe and deployment methodology. This initiative is, of course, massive in its complexity and would have far-reaching implication in 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 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 5,000 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 terminal, biometric readers, banking service, banking processing system, 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 1,000 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 those that have little or no access to competitive financial services and/or retail products. To this end, we have spent many years developing our technology core 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 performance at the infrastructure, such as electricity, communication, financial services, retail outlets or any other delivery channels. Our solution comprises of our very latest technology core 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 new enhanced neural network 12 net [ph] identification system. Our solutions can now provide interoperability across our and all traditional payment system, 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. A combination of these technologies ensures that we can provide the tools that are required to enhance service delivery, protect the frail, disabled and the most vulnerable and eliminate avenues for fraud and the abuse of the -- 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 guarantee intrinsic to these products will be -- constantly will be reduced or in fact, eliminated. Net1 is now positioned in such a way that it can continue to provide SASSA with the 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 fueling of rural economies and most importantly, to ensure financial inclusions for all South African citizens. While we focus on this challenging product -- project, we will also seek to capitalize on our international opportunities in Korea, new international UEPS deployment, our Mobile Virtual Card and our XeoHealth initiatives. Let me now review 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 sales agents to further penetrate the small- and medium-size merchant market, and we expect to see the benefits of those investments over the remainder of calendar 2012 and of course, beyond. KSNET management team is now also actively engaged is understanding Net1's broad product portfolio with a view to introduce certain of those products both in Korea as well as in surrounding territory. 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 3 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 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 begin our implementation of SASSA -- 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, [indiscernible] and municipalities. NUETS have developed a new limited investment software with a service business model aimed 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 model in a couple of new countries over the next couple of quarters. We are satisfied with the growth and 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 U.S., has already begun claims and education for CBH in Pennsylvania, and we have begun testing for the Recovery Audit Contractor services for North Dakota and Missouri. These RAC 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 draw the leanest standard option. 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 the true evaluation of the company. I believe that our management team, our technology and our diversification strategy in terms of currency, country and market segmentation will allow Net1 to regain its initial appeal with a lower risk profile and thus, deliver improved returns for its stakeholders. With that, let me turn over to my CFO, 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 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 ZAR 7.85 compared to ZAR 6.99 a year ago and negatively impacted our U.S. dollar based results by approximately 12%. The year-over-year comparability of our results for the quarter was impacted by the acquisition of Eason and in 2011, the intangible asset impairment. On a consolidated basis for third quarter of 2012, we reported revenue of $91 million, an increase of 10% in constant currency. Fundamental earnings per share was USD $0.28 compared to USD $0.38 a year ago. As I previously discussed, startup cost associated with our new SASSA contract weighed on profitability this quarter. We measure the group's profitability by looking at operating income and margin by segment. Over in our segments, SA transaction-based activities posted revenue of $46 million during Q3 2012, 10% are in local currency, driven by relatively flat revenue growth in pension and welfare, a 16% gain in merchant acquiring and 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 cost for the SASSA contract as well as the inclusion of Eason's prepaid e-card business, which has, by its nature, a high-volume but low-margin business and high-intangible amortization. To reiterate, we expect profitability in this segment to remain under pressure for another 2 to 3 quarters as we continue to invest in the infrastructure, distribution and personnel required to disburse 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 U.S. dollars. Segment operating income includes additional startup expenditure related to the launch of our Mobile Virtual Card and XeoHealth initiatives in the U.S. 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 a 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 U.S. 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 contract. Our new contract became effective on April 1 under which we are required to enroll approximately 15 million ground recipients and issue approximately 9.2 million payment cards initially. We will be paid ZAR 14.42, excluding value-added tax to beneficiary pays, which translates to approximately ZAR 153 million revenue per month. During Q3, we incurred direct 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 spent $14 million on capital expenditures, of which roughly half relates to infrastructures 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 infrastructures such as payment vehicle, equipment and branch network, while the majority of the remaining investments relate to payment cards and terminals. Our operating expenses should increase proportionally with revenue due to higher headcount as we employ additional people responsible for initial enrollment and issuance of cards as well as ongoing payments 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 principal 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 shakeout 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 U.S. GAAP, we will be required to book a noncash stock-based award charge of approximately $11.7 million in Q4 2012. Our priorities for uses of cash remain capital expenditures, strategic acquisitions, buybacks and debt repayments. To conclude on guidance, as mentioned previously, the next 2 to 3 quarters are difficult for us to predict given the timing and quantum of investments and startup cost to be incurred to ensure the implementation of our SASSA contract. However, for fiscal 2012, we expect fundamental EPS to be at least $1.40 on a constant currency basis, that is at ZAR 7 to $1, and using our third quarter shakeout of 45 million shares. It is worth noting that the current rand-dollar exchange rate is around ZAR 8 to $1 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] Our first question comes from Dave Koning of Baird.

So I guess my first question is -- I know you 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, getting conversations with new countries, et cetera. And I'm just wondering has that started to materialize? Have you seen a lot more activity talking with other countries now about your services or other, I guess, constituents? I just kind of wonder how that's progressed.

It's Serge here. As you know, we have just basically started the implementation of the SASSA contract on a national basis, and there is absolutely no doubt that this is something that's going to take a little bit of time to get done. As you can well imagine, this is -- we're talking about probably the largest project ever, ever commenced in this country, and it affects around 15 to 17 million people that are all very much in the poorest of the poorest 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've 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've 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 unbanked 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 that 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 inter-operate with the South African national payment system wherever it exists, but that together with our own infrastructure in rural and semi-rural areas probably gives is the largest infrastructure inside Africa compared to anybody else put together. So we're going to be spending quite a bit of time on that. In the meantime, to sort of address some of your other part of your question, there is no doubt that the success we have now had in South Africa, which has been demonstrated over the last 2 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 while at the same time, the same card can be fully EMV-compliant and utilized anywhere in the first world infrastructure, then I think we've got something that most countries actually are wanting to have." And that is something that we're already noticing, and we've 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're going to see acceleration in our penetration of developing economies and developing markets simply because we have a product now that actually links both unbanked and banked people together.

Yes. Great. Great color. And then I guess 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 in 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've talked about the 9.2 million that come out at ZAR 14.42 per beneficiary. The other 5.8 million or so that gets us to the 15 million that you talked in total that are -- that I guess presumably have accounts -- bank accounts already, where will the revenue from that show up? And how much would that be?

Dave, 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 today are grant recipients or beneficiaries, but the grants are actually, obviously, paid to their legal guardians, okay? So part of the new tender process 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 entire population of grant beneficiaries registered, you can't perform all the required tests and checks that was thought about in the process in order to eliminate the duplicates or the invalid grant recipients. So in a nutshell, we've 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 as part of our offering and biometric enroll them. But we obviously don't issue them with a card, because they're 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. Of this, the 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 recipient numbers once we've performed all of the validation checks to eliminate the duplicates. 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's also no maximum in terms of the grant beneficiaries. And so if we just do a quick reconciliation of what we expect from a revenue point of view, from the 1st of April, we had 9.2 million grant recipients. Those get invoiced at a rate of ZAR 14.47 each. Excluding that -- and so that gives us a total of ZAR 153 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 the base of 9.3 million cardholders. But as SASSA is concerned, there will be one invoice that goes to them per month. At this point in time, that invoice is for ZAR 453 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 quarter, South Africa business goes up about $15 million sequentially? Is that at least in the ballpark? I just want to make sure that we're somewhat close.

Dave, obviously, that depends. This Dhruv, sorry. It depends on the rand, but I think you've obviously got your models and assumptions for the rest of the business. The SASSA-related business will be ZAR 133 million per month, give or take number of people. So that times 3 gets you your quarterly figure.

Our next question comes from Tom McCrohan of 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 the 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 profit organization. They understand that 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, reduce cost, 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 many other poorer people that are not banked today using our infrastructures, because it's the same infrastructure, which of course for us is great, because it will fall to the bottom line. Two, Herman's spoken about the children and all the children that they 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're 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-added insurance or small mark 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 not going to basically put all of our pensioners under from a financial position. So working with SASSA, we believe gives us a huge advantage to be able to tailormade 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 3 components together, we firmly believe we can build the business over time as it could be as exciting, as big, if not bigger, than the revenue that we make out to SASSA itself.

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

It's 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's a 50-50 split right now as we speak. But we're already seeing, even after 2 months of operation with the new system and people having the ability to go now anywhere, being at the existing infrastructure of the banks, being at our merchant, being the bank's merchant or being at our pay-point, we're already finding shifts 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's 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're already monitoring the shifts statistically to see what's going to happen. For us, it's getting to the stage where from a 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 is higher. But because rural area has 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 fact, 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 or the same margin or the same income through 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 10-Q related to the stock option or issued to BEE?

I know that, that's -- we -- 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 U.S. 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.

Okay. And the direct versus capitalized, I mean, you've given some guidance on the $45 million to $50 million of capitalized expenditures related to this whole SASSA ramp of the new contract. But what flows to the P&L is the direct stuff, so you had $7 million this quarter, most of which was the cash bonus paid to executives. Can -- 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's difficult for us right now to give it an exact quantum. The personnel, with the headcount charge, is really going to be driven through the continued employment of some temporary workers. We -- if you look at the table that we provided, we have 2,200-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've 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 at which they wish us 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 overhead charge or the direct expense charge as it relates specifically to the enrollment will be fairly erratic over the next 2 to 3 quarters. And it's quite difficult for us right now to give you an exact number around that.

Okay. And the phasing being completed by the third quarter of fiscal 2013, I thought last quarter was going to be done by second quarter. So can you just give us a comfort level why it kind of bumped out a quarter, it's only a quarter, and a comfortable level with this now-revised completion date?

The whole rollout plan, obviously, as you can imagine, is a very big logistical exercise. It doesn't only, unfortunately, sometimes recount -- 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 signed in the first week of February, and it really only gave us 6 weeks to prepare and to commence the payments on the 1st of April for 9.2 million beneficiaries. So as we're going along, there is obviously, daily, sometimes hourly consultation with SASSA in terms of the rollout plan. It changes from time to time depending on specific circumstances. And that's why already further loss, a tough couple of weeks, you would have seen a slight change in the plan that we have. Be that as it may, we obviously paid all 9.2 million beneficiaries on the 1st of April. So there's 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's simply a matter of the rate at which we do a biometric enrollment for the entire cardholder population.

And just -- I know it's a lot. It's 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? Because I did not -- I wasn't aware until I read the press release that there was a cash bonus pool that was going to be paid out after you guys were awarded the contract.

Tom, it's Dhruv. There was a 8-K filed with the details of the bonus award back a quarter ago with our second quarter results, and that has all of the details you're looking for.

Okay. Can you remind me, Dhruv, are there clawback provisions? Like if certain milestones are not met or given the guidance at the contract -- this new contract is going to be contributing at least as much operating profit as the prior contract. And if that doesn't happen, are there any clawback provisions with bonuses paid out?

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

Our next question comes from Kevin Tracey of Oberon Asset Management.

Okay. 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 capital. So I'm curious, in terms of an NPV, if you guys expect a positive NPV within the first -- within the 5-year term of the contract. Or if in order to get to that positive NPV, you're assuming that you'll be able to sell additional services based -- using their infrastructure after this 5-year term is up?

We expect to have a positive NPV on the investment required over the tip of the contract regardless of the additional goods or services that we may sell during the 5-year period. So the way that we've calculated our capital investment and obviously, the anticipated revenue and income flows indicate to us that the NPV over 5 years should be a positive number.

Okay. Great. And then with regard to your Korean business, it seems like it's 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're clearly going to be focusing on your South -- 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.

Yes. This becomes a strategic question. And if one looks at things logically, what we try to attempt to do in South Africa is something, as you all know, we've 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 on the worldwide -- when we compare it to the worldwide market. South African market is still very much small. We can certainly make a lot of money here. And we know that that is the case, and we'll continue to do so. But for us, we still -- we have to have a vision that allows us to actually deploy our technology elsewhere 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 is 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, who 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 happen. And we've always said that, that 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 half rather than with consultants or with the other types of programs. So for us, we don't see any 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 expanding their own business but also to use it, as I say, as a trampoline to actually definitely push our technologies elsewhere. So we will certainly continue to monitor its performance. There's not doubt about that. But I think you're going to -- we're all going to be quite surprised what one can do with this.

Okay. And my last question is with regard to your EasyPay business. I know that you're shutting down some of the lower margin components of that business. But looking at your 10-Q, when you break out the discontinued and 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 or give an idea if something has fundamentally changed with regard to that business?

Yes. I think if you look at EasyPay -- and once again, you've got to try to get into our heads when it comes to what do we do and why do we do it and what's our strategy around it. For us, EasyPay, remember, was giving us the entry point into many merchants who are 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, et cetera, et cetera, 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's 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 is 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 stop 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 a huge advantage to actually package the 2 together. So the loss that you've seen, that I believe you've seen, is the one which is geared to I think switching for one of our customers who decided to take the switch in-house. What you're not seeing at this point in time is that, that's 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's going to move into another segment. So we're 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're going to have to restructure those, in my view, in a different way, because right now, they're becoming a little opaque simply because things can move from one to the other and nobody that really knows where it's 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, in fact, it did in the past.

Kevin, this is Dhruv. Just to sort of go back on the specific transaction numbers that we have disclosed, last quarter, we've said that one of the customers will move their switching in-house. So you only had a partial quarter impact. So in Q3, you saw a full quarter impact.

Our next question comes from John Helmers of Swiftwater Capital.

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

It's -- of course, it's 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's point number one. We've never done any deals based on that type of thing. You're right. There has been some -- there has been a number of press articles that has gone 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 been behind the generation of these articles. And obviously, this 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 will -- we certainly, in the company, we've 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 our nose clean for the last 6 or 7 years or even beyond that but according to 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 also very, very important, is that SASSA, we believe, is particularly happy with what we've done so far. I think there's 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 newspapers.

And our final question comes from John Zaro of Bourgeon Capital.

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

Sure. It's 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.

And is there any -- I mean, is there any sort of precedence for how they do that? Does it -- is it usually done sooner or later or at the last second?

Well, it's all a function, really, of the financing arrangements that they would need to take into account. Obviously, to arrange the funding for approximately $90 million in the South African context becomes an aspect that needs to be considered. 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 ZAR 97 billion worth of BEE financing by 2013. So it's 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 request. And once that is complete, they will obviously immediately exercise the specific options. I think in their -- I can't 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 lock-up period that is inherent to these shares, and I'm pretty sure that they would want that period to start as soon as possible.

Just in addition to that, I think there is no doubt in my mind that 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 would like to participate and to be -- become a very major shareholder in the company as soon as possible, rather sooner rather than later. And for them, right now the price or the share price is really academic. They're more interested in getting in and to play an active -- a more active role rather than to wait for another 6 or 9 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're working to do as a regular course of business. In other words, this is the major part of your business. You've been working on it for years and years and years. We've all suffered waiting for this contract to get done. Not to say that you shouldn't 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?

Yes, I think it's...

In other words, that's why you come to work everyday, was to get that -- to get it accomplished.

Yes. And I think you are probably right. That's definitely one of the reasons that we have been coming to work everyday, in order to accomplish this particular thing. I think simply the -- and it's difficult, I suppose, from where you are to understand what's involved in doing what we've 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 1/4 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 2 years or 3 years or 4 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 occasion. And we've 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 to 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 executive and many of the other staff members of Net1 have done over the last 5 years, and I can assure you that it hasn't been maybe a walk in the park. Not like any other business was 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 5 or 6 years ago. And we think that, that is something that is going to be substantially rewarding for all of our shareholders, and there's no reason why it should not be rewarding for the executive and the 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.