JOHANNESBURG, South Africa, Nov. 6 /PRNewswire-FirstCall/ -- Net 1
UEPS Technologies, Inc. ("Net1" or the "Company")
(NASDAQ:UEPS)(JSE:NT1) today announced results for the three months
ended September 30, 2008. Results Three months ended September 30,
2008 and 2007 GAAP GAAP GAAP Fundamental Q1 Q1 Variance Fundamental
Fundamental Variance 2009 2008 % Q1 2009(1) Q1 2008(1) % Net income
(USD'000) 26,244 17,928 46% 22,696 19,659 15% Earnings per share,
basic (US cents) 46 31 48% 40 34 18% Revenue (USD'000) 67,935
60,259 13% 67,935 60,259 13% (1) - Fundamental net income and
earnings per share is GAAP net income and earnings per share
excluding the amortization of acquisition-related intangible
assets, net of deferred taxes, stock-based compensation charges
and, where applicable, the effect of the change in the fully
distributed tax rate from 35.45% to 34.55%. In addition,
Johannesburg Stock Exchange ("JSE") listing costs, a bank facility
fee and an unrealized foreign exchange gain related to a short-term
investment are also excluded in calculating fundamental net income
and earnings per share. Since the Company's reporting currency is
the US dollar ("USD") but its functional currency is the South
African rand ("ZAR"), and due to the impact of currency
fluctuations between the USD and the ZAR on the Company's results
of operations, the Company also analyzes its results of operations
in ZAR to assist investors in understanding the changes in the
underlying trends of its business. The USD was stronger against the
ZAR during the three months ended September 30, 2008, as compared
with the prior period. The impact of these changes on results of
operations is shown under the column "Change" in the tables of key
metrics included in Attachment A at the end of this press release.
GAAP GAAP GAAP Fundamental Q1 Q1 Variance Fundamental Fundamental
Variance 2009 2008 % Q1 2009(1) Q1 2008(1) % Net income (ZAR'000)
204,821 127,715 60% 176,673 140,049 26% Earnings per share, basic
(ZAR cents) 357 224 59% 308 245 26% Revenue (ZAR'000) 530,197
429,269 24% 530,197 429,269 24% (1) - Fundamental net income and
earnings per share is GAAP net income and earnings per share
excluding the amortization of acquisition-related intangible
assets, net of deferred taxes, stock-based compensation charges
and, where applicable, the effect of the change in the fully
distributed tax rate from 35.45% to 34.55%. In addition, JSE
listing costs, a bank facility fee and an unrealized foreign
exchange gain related to a short-term investment are also excluded
in calculating fundamental net income and earnings per share. Use
of Non-GAAP measures US securities laws require that when we
publish any non-GAAP measures we disclose the reason for using the
non-GAAP measure and provide reconciliation to the directly
comparable GAAP measure. The presentation of fundamental earnings
and headline earnings per share are non-GAAP measures. Fundamental
earnings Under US generally accepted accounting principles
("GAAP"), the Company is required to fair value all intangible
assets on the date of acquisition and amortize these intangible
assets over their expected useful lives. In addition, under GAAP,
the Company is required to measure the fair value of options and
other stock-based awards and recognize a stock-based compensation
charge over the requisite service period. The Company's GAAP net
income and earnings per common share for the three months ended
September 30, 2008 and 2007 includes amortization of intangibles
and stock-based compensation charges related to stock options and
other stock-based awards, as well as JSE listing costs, a bank
facility fee and an unrealized foreign exchange gain related to a
short-term investment. Finally, the effect of the change in the
fully distributed tax rate from 35.45% to 34.55% in July 2008 is
included in the Company's net income and earnings per common share
for the period ended September 30, 2008. The Company excludes all
of the above-mentioned amounts when calculating fundamental net
income and earnings per common share because management believes
that these adjustments enhance its own evaluation, as well as an
investor's understanding, of the Company's financial performance.
Attachment B presents a reconciliation between GAAP and fundamental
net income and earnings per common share. Headline earnings per
share ("HEPS") The inclusion of HEPS in this press release is a
requirement of our listing on the JSE. HEPS basic and diluted are
calculated using net income which has been determined based on US
GAAP. Accordingly, this may differ to the headline earnings per
share calculation of other companies listed on the JSE as these
companies may report their financial results under a different
financial reporting framework, including, but not limited to,
International Financial Reporting Standards. Attachment C presents
the reconciliation between our net income used to calculate
earnings per share basic and diluted and headline earnings per
share basic and diluted. First Quarter Highlights -- Acquisition of
BGS Smartcard Systems AG, an Austrian private company on August 27,
2008; -- Successful demonstration of UEPS technology, together with
Sberbank, to the Prime Minister of the Russian Federation at the
World Economic Forum in Sochi; -- Successful launch of our UEPS
solution in Iraq for the distribution of grants; -- Commencement of
registration of grant recipients in Botswana; Successful launch of
our UEPS fleet management system with Wesbank in South Africa; --
Continued wide-spread implementation of the UEPS technology across
multiple business segments in Ghana; -- Implementation of our wage
payments system with our first major corporate customer; --
Increased revenues and operating income in all provinces where we
distribute social welfare grants; -- Merchant acquiring system
transactions increased 20% to $319.4 million in the first quarter
of fiscal 2009 from $266.9 million in the first quarter of fiscal
2008 and the number of transactions processed per terminal
increased 24% from the first quarter of fiscal 2008; -- The total
number of active UEPS smart card-based accounts increased 2% to
4,039,359 as of September 30, 2008, compared to September 30, 2007;
and -- The number of transactions processed by EasyPay increased
14% from the first quarter of fiscal 2008. Comments and Outlook "I
am very pleased with the results of our activities during the first
quarter of fiscal 2009," said Dr. Serge Belamant, Chairman and
Chief Executive Officer of Net1. "The success of our business model
is apparent in our financial results, despite the recent
disruptions in the financial markets and concerns about a weakening
global economy. I am particularly pleased to welcome the BGS team
to the Net1 family and we are excited about the new dimension that
this acquisition brings to Net1 to accelerate the global deployment
of our technology," he concluded. "We maintain our outlook of 15%
fundamental earnings per share growth on a constant currency basis
for fiscal 2009," said Herman Kotze, Chief Financial Officer of
Net1. "Our GAAP earnings per share growth should exceed 25% on a
constant currency basis as a result of the change in tax rates and
the foreign exchange gains on a short-term investment," he
concluded. Conference call Net1 will host a conference call to
review first quarter results on November 7, 2008, at 8:00 a.m.
Eastern Standard Time. To participate in the call, dial
1-800-860-2442 (US only), 1-866-519-5086 (Canada only), 0-800-917-
7042 (U.K. only) or 0-800-200-648 (South Africa only) five minutes
prior to the start of the call. Callers should request "Net1 call"
upon dial-in. The call will also be webcast on the Net1 homepage,
http://www.net1ueps.com/. Please click on the webcast link at least
10 minutes prior to the call. A webcast of the call will be
available for replay on the Net1 website through November 28, 2008.
About Net1 (http://www.net1ueps.com/) Net1 provides its universal
electronic payment system, or UEPS, as an alternative payment
system for the unbanked and under-banked populations of developing
economies. The Company believes that it is the first company
worldwide to implement a system that can enable the estimated four
billion people who generally have limited or no access to a bank
account to enter affordably into electronic transactions with each
other, government agencies, employers, merchants and other
financial service providers. To accomplish this, the Company has
developed and deployed the UEPS. This system uses secure smart
cards that operate in real-time but offline, unlike traditional
payment systems offered by major banking institutions that require
immediate access through a communications network to a centralized
computer. This offline capability means that users of Net1's system
can enter into transactions at any time with other cardholders in
even the most remote areas so long as a portable offline smart card
reader is available. In addition to payments and purchases, Net1's
system can be used for banking, health care management,
international money transfers, voting and identification. The
Company also focuses on the development and provision of secure
transaction technology, solutions and services. The Company's core
competencies around secure online transaction processing,
cryptography and integrated circuit card (chip/smart card)
technologies are principally applied to electronic commerce
transactions in the telecommunications, banking, retail, petroleum
and utilities market sectors. These technologies form the
cornerstones of the "trusted transactions" environment of Prism, a
South African based subsidiary of the Company, and provide the
Company with the building blocks for developing secure end-to-end
payment solutions. Net1 recently acquired 80.1% of BGS Smartcard
System AG ("BGS"), an Austrian company, whose core business
consists of developing and integrating smart card-based offline and
online financial transaction systems. Since 1993, BGS has
implemented tailor-made smart card-based payment solutions,
focusing on emerging economies and in cooperation with banks,
enterprises and government authorities. BGS is headquartered in
Vienna, Austria, and has subsidiaries in India and Russia, and a
branch office in the Ukraine. Distributors are located in Asia,
Central and South America, the Commonwealth of Independent States
and the Middle East. Forward-Looking Statements This announcement
contains forward-looking statements that involve known and unknown
risks and uncertainties. A discussion of various factors that could
cause the Company's actual results, levels of activity, performance
or achievements to differ materially from those expressed in such
forward-looking statements are included in the Company's filings
with the Securities and Exchange Commission. The Company undertakes
no obligation to revise any of these statements to reflect future
circumstances or the occurrence of unanticipated events. NET 1 UEPS
TECHNOLOGIES, INC. Unaudited Condensed Consolidated Statements of
Operations Three months ended September 30, 2008 2007 (In
thousands, except per share data) REVENUE $67,935 $60,259 EXPENSE
COST OF GOODS SOLD, IT PROCESSING, SERVICING AND SUPPORT 19,236
15,143 SELLING, GENERAL AND ADMINISTRATION 17,998 16,464
DEPRECIATION AND AMORTIZATION 3,423 2,746 OPERATING INCOME 27,278
25,906 UNREALIZED FOREIGN EXCHANGE GAIN RELATED TO SHORT-TERM
INVESTMENT 6,076 - INTEREST INCOME, net 3,162 2,982 INCOME BEFORE
INCOME TAXES 36,516 28,888 INCOME TAX EXPENSE 9,902 10,872 NET
INCOME FROM CONTINUING OPERATIONS BEFORE MINORITY INTEREST AND LOSS
FROM EQUITY-ACCOUNTED INVESTMENTS 26,614 18,016 MINORITY INTEREST
60 (196) LOSS FROM EQUITY-ACCOUNTED INVESTMENTS (310) (284) NET
INCOME $26,244 $17,928 Net income per share Basic earnings, in
cents - common stock and linked units 45.7 31.4 Diluted earnings,
in cents - common stock and linked units 45.4 31.2 NET 1 UEPS
TECHNOLOGIES, INC. Condensed Consolidated Balance Sheets Unaudited
(A) September 30, June 30, 2008 2008 (In thousands, except share
data) ASSETS CURRENT ASSETS Cash and cash equivalents $245,924
$272,475 Pre-funded social welfare grants receivable 64,834 35,434
Accounts receivable, net of allowances of - September: $243; June:
$260 42,048 21,797 Finance loans receivable, net of allowances of -
September: $1,086; June: $1,007 4,114 4,301 Deferred expenditure on
smart cards 98 78 Inventory 6,840 6,052 Deferred income taxes 6,112
5,597 Total current assets 369,970 345,734 LONG-TERM RECEIVABLE 192
207 PROPERTY, PLANT AND EQUIPMENT, NET OF ACCUMULATED DEPRECIATION
OF - September: $25,759; June: $24,753 8,297 6,291 EQUITY-ACCOUNTED
INVESTMENTS 2,969 2,685 GOODWILL 114,310 76,938 INTANGIBLE ASSETS,
NET OF ACCUMULATED AMORTIZATION OF - September: $18,461; June:
$16,486 92,344 22,216 TOTAL ASSETS 588,082 454,071 LIABILITIES
CURRENT LIABILITIES Short-term loan facility 110,000 - Accounts
payable 8,379 4,909 Other payables 49,880 57,432 Income taxes
payable 17,058 14,162 Total current liabilities 185,317 76,503
DEFERRED INCOME TAXES 38,716 33,474 OTHER LONG-TERM LIABILITIES,
including minority interest loans 4,507 3,766 COMMITMENTS AND
CONTINGENCIES - - TOTAL LIABILITIES 228,540 113,743 MINORITY
INTEREST 1,898 - SHAREHOLDERS' EQUITY COMMON STOCK Authorized:
83,333,333 with $0.001 par value; Issued shares - September:
53,598,304; June: 53,423,552 52 52 SPECIAL CONVERTIBLE PREFERRED
STOCK Authorized: 50,000,000 with $0.001 par value; Issued and
outstanding shares - September: 4,801,291; June: 4,882,429 5 5 B
CLASS PREFERENCE SHARES Authorized: 330,000,000 with $0.001 par
value; Issued and outstanding shares (net of shares held by Net1) -
September: 35,377,959; June: 35,975,818 6 6 ADDITIONAL
PAID-IN-CAPITAL 121,625 119,283 TREASURY SHARES, AT COST:
September: 306,269; June: 306,269 (7,950) (7,950) ACCUMULATED OTHER
COMPREHENSIVE LOSS (49,090) (37,820) RETAINED EARNINGS 292,996
266,752 TOTAL SHAREHOLDERS' EQUITY 357,644 340,328 TOTAL
LIABILITIES AND SHAREHOLDERS' EQUITY $588,082 $454,071 (A) -
Derived from audited financial statements NET 1 UEPS TECHNOLOGIES,
INC. Unaudited Condensed Consolidated Statements of Cash Flows
Three months ended September 30, 2008 2007 (In thousands) Cash
flows from operating activities Net income $26,244 $17,928
Depreciation and amortization 3,423 2,746 Loss from
equity-accounted investments 310 284 Fair value adjustment related
to financial liabilities (36) (73) Fair value of FAS 133 derivative
adjustments 64 7 Unrealized foreign exchange gain related to
short-term investment (6,076) - Interest payable 639 117 Loss
(Profit) on disposal of property, plant and equipment 1 (10)
Minority interest 60 (196) Stock-based compensation charge 1,205
841 Facility fee amortized 748 - (Increase) Decrease in accounts
receivable, pre-funded social welfare grants receivable and finance
loans receivable (46,141) 5,538 (Increase) Decrease in deferred
expenditure on smart cards (23) 94 Increase in inventory (217)
(1,765) (Decrease) Increase in accounts payable and other payables
(14,415) 12,419 Decrease in taxes payable 3,409 496 (Decrease)
Increase in deferred taxes (2,170) 1,817 Net cash (used in)
provided by operating activities (32,975) 40,243 Cash flows from
investing activities Capital expenditures (2,844) (671) Proceeds
from disposal of property, plant and equipment 1 41 Acquisition of
BGS, net of cash acquired (95,328) - Acquisition of shares in
equity-accounted investments (550) - Net cash used in investing
activities (98,721) (630) Cash flows from financing activities
Proceeds from issue of share capital, net of share issue expenses
155 150 Proceeds from short-term loan facility 110,000 - Payment of
facility fee (1,100) - Proceeds from bank overdrafts 2 9 Repayment
of bank overdraft (1) (16) Net cash provided by financing
activities 109,056 143 Effect of exchange rate changes on cash
(3,911) 4,039 Net (decrease) increase in cash and cash equivalents
(26,551) 43,795 Cash and cash equivalents - beginning of period
272,475 171,727 Cash and cash equivalents - end of period $245,924
$215,522 Net 1 UEPS Technologies, Inc. Attachment A Key metrics and
statistics at and for the three months ended September 30, 2008 and
2007 and June 30, 2008: Three months ended September 30, 2008 and
2007 and June 30, 2008 Change - constant Key statement of Change -
actual exchange rate(1) operations Q1 '09 Q1 '09 Q1 '09 Q1 '09
data, vs vs vs vs in '000, Q1 '09 Q1 '08 Q4 '08 Q1 '08 Q4 '08 Q1
'08 Q4 '08 except EPS USD USD USD Revenue $67,935 $60,259 $62,231
13% 9% 24% 9% Operating income 27,278 25,906 27,604 5% (1)% 15%
(1)% Income tax expense 9,902 10,872 11,376 (9)% (13)% 0% (13)% Net
income $26,244 $17,928 $21,482 46% 22% 60% 22% Earnings per share,
Basic (cents) 46 31 38 48% 21% 63% 21% Diluted (cents) 45 31 37 45%
22% 59% 22% Fundamental earnings per share, Basic (cents) 40 34 41
18% (2)% 29% (2)% Key segmental data, in '000, except margins
Revenue: Transaction- based activities $40,344 $38,164 $38,035 6%
6% 16% 6% Smart card accounts 8,570 9,136 8,445 (6)% 1% 3% 2%
Financial services 1,784 2,183 1,934 (18)% (8)% (10)% -8% Hardware,
software and related technology sales 17,237 10,776 13,817 60% 25%
75% 25% Total consolidated revenue $67,935 $60,259 $62,231 13% 9%
24% 9% Consolidated operating income (loss): Transaction- based
activities $21,638 $20,589 $21,912 5% (1)% 15% (1)% Smart card
accounts 3,895 4,152 3,840 (6)% 1% 3% 1% Financial services 327 446
524 (27)% (38)% (20)% (38)% Hardware, software and related
technology sales 4,134 1,940 2,123 113% 95% 133% 95% Corporate/
Eliminations (2,716) (1,221) (795) 122% 242% 144% 242% Total
operating income $27,278 $25,906 $27,604 5% (1)% 15% (1)% Operating
income margin (%) Transaction- based activities 54% 54% 58% Smart
card accounts 45% 45% 45% Financial services 18% 20% 27% Hardware,
software and related technology sales 24% 18% 15% Overall operating
margin 40% 43% 44% Key balance sheet Sep 30, Jun 30, data, in '000
2008 2008 Change Cash and cash equivalents $245,924 $272,475 (10)%
Total current assets 369,970 345,734 7% Total assets 588,082
454,071 30% Total current liabilities 185,317 76,503 142% Total
shareholders' equity $357,644 $340,328 5% (1) - This information
shows what the change in these items would have been if the USD/ZAR
exchange rate that prevailed during the first quarter of fiscal
2009 also prevailed during the first quarter of fiscal 2008 and the
fourth quarter of fiscal 2008. Three months ended September 30,
2008 and 2007 and June 30, 2008 (continued) Change Q1 '09 Q1 '09
Additional vs vs information: Q1 '09 Q1 '08 Q4 '08 Q1 '08 Q4 '08
Transaction-based activities: Total number of grants paid:
KwaZulu-Natal 5,230,041 5,040,155 5,182,170 4% 1% Limpopo 2,958,456
2,935,110 2,957,809 1% -% North West 1,385,537 1,219,059 1,289,828
14% 7% Northern Cape 497,726 496,101 496,884 -% -% Eastern Cape
2,058,236 2,137,975 2,047,136 (4)% 1% 12,129,996 11,828,399
11,973,827 3% 1% Average revenue per grant paid: ZAR ZAR ZAR
KwaZulu-Natal 23.89 21.01 23.83 14% -% Limpopo 18.15 16.76 18.56 8%
(2)% North West 25.68 21.10 22.39 22% 15% Northern Cape 24.03 19.06
24.05 26% -% Eastern Cape 16.52 15.02 16.52 10% -% UEPS merchant
acquiring system: Terminals installed at period end 4,170 4,305
4,394 (3)% (5)% Number of participating retail locations at period
end 2,382 2,578 2,454 (8)% (3)% Value of transactions processed
through POS devices during the quarter (in ZAR '000) 2,486,912
1,901,570 2,243,592 31% 11% Value of transactions processed through
POS devices during the completed pay cycles for the quarter (in ZAR
'000) 2,288,288 1,900,684 2,178,596 20% 5% Average number of grants
processed per terminal during the quarter 1,061 858 965 24% 10%
Average number of grants processed per terminal during the
completed pay cycles for the quarter 983 858 936 15% 5% EasyPay
transaction fees: Number of transactions processed 135,240,966
119,032,899 133,380,549 14% 1% Average fee per transaction (in ZAR)
0.22 0.21 0.22 5% -% Three months ended September 30, 2008 and 2007
and June 30, 2008 (continued) Change Q1 '09 Q1 '09 vs vs Q1 '09 Q1
'08 Q4 '08 Q1 '08 Q4 '08 Smart card accounts: Total number of smart
card accounts 4,039,359 3,943,580 4,022,193 2% -% Hardware,
software and related technology sales: Ad hoc significant hardware
sales (USD '000) Nedbank hardware 2,300 - 700 n/m 229% Ghana - in
terms of contract 3,900 1,000 5,000 290% (22)% Financial services:
(USD '000) Traditional microlending: Finance loans receivable -
gross 2,595 5,249 2,864 (51)% (9)% Allowance for doubtful finance
loans receivable (1,086) (3,011) (1,007) (64)% 8% Finance loans
receivable - net 1,509 2,238 1,857 (33)% (19)% UEPS-based lending:
Finance loans receivable - net and gross (i.e., no provisions)
2,605 3,064 2,444 (15)% 7% Earnings (Loss) from equity-accounted
investments: (USD '000) Beginning of period (2,611) (1,774) (2,389)
Equity-accounted earnings (loss) (310) (284) (235) Equity-accounted
earnings (loss) - SmartSwitch Namibia(1) 6 (6) 11 Equity-accounted
earnings (loss) - SmartSwitch Botswana(1) (35) (92) 97
Equity-accounted (loss) - VTU Colombia (246) (159) (301)
Equity-accounted (loss) - VinaPay (35) (27) (42) Foreign currency
adjustment 222 (54) 13 End of period (2,699) (2,112) (2,611) nm -
Statistic not meaningful (1) - includes the elimination of
unrealized net income Net 1 UEPS Technologies, Inc. Attachment B
Reconciliation of GAAP results to fundamental results: Three months
ended September 30, 2008 Three months ended September 30,
Amortization Stock- 2008 2008 of intangible based Funda- GAAP
assets(1) charge(2) Other(3) mental Net income (USD'000) 26,244
1,490 1,205 (6,243) 22,696 Earnings per share, basic (USD cents) 46
40 Net income (ZAR'000) 204,821 11,631 9,404 (49,184) 176,673
Earnings per share, basic (ZAR cents) 357 308 (1) Amortization of
Prism, EasyPay and BGS intangibles, net of deferred tax benefit: $
'000 ZAR '000 Customer relationships 1,203 9,389 Trademarks 87 679
Software and unpatented technology 851 6,642 Deferred tax benefit
(651) (5,079) 1,490 11,631 (2) Includes stock-based compensation
charges related to options and non-vested stock awards. (3) Other
includes the following: $ '000 ZAR '000 Tax rate change (3,456)
(26,524) JSE listing costs 441 3,442 Facility fee 748 5,838
Unrealized foreign exchange gain related to a short-term
investment, net of tax of $2,100 (3,976) (31,940) (6,243) (49,184)
Three months ended September 30, 2007 Three months ended September
30, Amortization of Prism and EasyPay Stock- 2007 2007 intangible
based Funda- GAAP assets(1) charge(2) mental Net income (USD'000)
17,928 890 841 19,659 Earnings per share, basic (USD cents) 31 34
Net income (ZAR'000) 127,714 6,344 5,991 140,049 Earnings per
share, basic (ZAR cents) 224 245 (1) Amortization of Prism and
EasyPay intangibles, net of deferred tax benefit: $ '000 ZAR '000
Customer relationships 369 2,630 Software and unpatented technology
95 679 Trademarks 932 6,642 Deferred tax benefit (506) (3,607) 890
6,344 (2) Includes stock-based compensation charge. Net 1 UEPS
Technologies, Inc. Attachment C Reconciliation of net income used
to calculate earnings per share basic and diluted and headline
earnings per share basic and diluted: Three months ended September
30, 2008 and 2007 2008 2007 Net income (USD'000) $26,244 $17,928
Adjustments: Profit on sale of property, plant and equipment
(USD'000) (1) (10) Tax effects on above (USD'000) - 4 Net income
used to calculate headline earnings (USD'000) $26,243 $17,922
Weighted average number of shares used to calculate net income per
share basic earnings and headline earnings per share basic earnings
('000) 57,436 57,110 Weighted average number of shares used to
calculate net income per share diluted earnings and headline
earnings per share diluted earnings ('000) 57,766 57,453 Headline
earnings per share: Basic earnings - common stock and linked units,
in US cents 46 31 Diluted earnings - common stock and linked units,
in US cents 45 31 Net 1 UEPS Technologies, Inc. Attachment D
FREQUENTLY ASKED QUESTIONS 1. What is the status of the SASSA
tender? On November 3, 2008, we received the final decision in
respect of the Payment Service Tender from the CEO of the South
African Social Security Agency ("SASSA"), advising us that the CEO
has decided to: (i) make no award of tenders submitted in response
to SASSA Tender 19/06/BS and to terminate the procurement process;
and (ii) defer a decision about commencing a fresh tender process
for the provision of a social assistance grants payment service.
The CEO cited a number of defects in the original request for
proposals published by SASSA and in the bid evaluation process. 2.
How does the cancellation of the tender influence the current
contracts? Our current contracts expire on March 31, 2009. We
believe that SASSA's statement to defer a decision about commencing
a fresh tender process will necessitate a further extension of our
current contracts. The terms and conditions of our current service
level agreements will probably remain unchanged during any
extension period. 3. How does the cancellation of the tender
influence your strategic planning? SASSA may decide to extend our
current contracts on a short term renewal basis. We have the
capacity to operate this business without compromising our high
service levels regardless of the period, or frequency, of any
extension periods granted. Our medium and long term strategic goals
are not dependent on our social welfare payments business. Our
strategic planning is focused on the globalization of our
technology by following a disciplined approach to new markets,
through careful evaluation of new opportunities. Where we believe
it makes sense, we will use partnerships or make acquisitions to
accelerate our entry into new markets. Our technology is unique and
unlike any other payment system, resulting in sales cycles that are
unpredictable and often stretch over a period of years. It is
therefore particularly difficult to provide clear short term
visibility on our international prospects and the specific product,
application or business model that will ultimately be implemented
in a specific country or territory as a myriad of factors need to
be considered, such as the corporate and regulatory environment,
central bank requirements, tax regimes, compilation of business
plans, etc. We have dedicated sales and marketing teams who focus
on our specific target regions of Africa, the Middle East and
Central and Eastern Europe and we plan to introduce dedicated teams
for South America and Asia-Pacific Rim in the near future. We have
expanded our strategic planning to include the BGS activities and
prospects, with particular emphasis on significantly expanding the
application of our technology in the Russian Federation and the CIS
Republics with our current partners as well as other interested
organizations. We recently completed a comprehensive training
program of the BGS business development team to ensure that their
activities are aligned with the Net1 group strategy. 4. What was
the rationale for acquiring BGS Smartcard Systems AG ("BGS")? BGS
is an Austrian company whose core business consists of developing
and integrating smart card-based offline and online financial
transaction systems. Since 1993, BGS has implemented tailor-made
smart card-based payment solutions, focusing on emerging economies
and in cooperation with banks, enterprises and government
authorities. BGS has provided systems to customers in Russia,
Ukraine, Uzbekistan, India and Oman. BGS' system, Dual Universal
Electronic Transactions ("DUET"), was developed by BGS as a
derivative of the first version of our UEPS technology that we
licensed to BGS in 1993. BGS' largest customer is Sberbank, the
largest financial institution in Russia, which owns the remaining
19.9% of BGS. BGS is headquartered in Vienna, Austria, and has
subsidiaries in India and Russia, and a branch office in the
Ukraine. Distributors are located in Asia, Central and South
America, the Commonwealth of Independent States and the Middle
East. BGS employs more than 100 people worldwide, including 75
staff members in the research and development and the technical
division. BGS' approach is to offer its customers an adaptive and
flexible turnkey solution which encompasses modular smart card and
back-office solutions, hardware, consulting services, product
customization and integration, installation, system implementation
and technical support and training. We believe that the acquisition
of BGS offers numerous potential strategic benefits, including the
following: -- Increasing Net1's revenues from providing its
financial services and value-added products to a new cardholder
base. BGS has historically employed a business model which focused
on selling its product offering into various countries. In
contrast, Net1's service-based business model focuses on generating
continuing revenues from its cardholder base through
transaction-based fees, financial services and value-added
products. We believe that the geographical footprint of BGS is now
large enough to allow us to overlay our service-based model onto
the various DUET systems operating in Russia and other countries,
thereby creating new revenue streams for BGS and system operators.
-- Enhancing Net1's product offering by leveraging technology
platforms and IT development resources. We believe that our
technological leadership in fields such as biometric identification
and in the integration of its UEPS technology with GSM will allow
us to create new business opportunities for BGS such as national
identification, voting and welfare distribution systems and cell
phone-based payment solutions. Further, the addition of BGS'
skilled human resources in the information technology area should
greatly assist us in the ongoing development of our technologies
and maintenance of our existing systems. -- Increasing the depth of
the management team with the addition of experienced executives.
Leonid Delberg and Richard Schweger have led BGS since 1997 and
have over 25 years of combined experience in the smart card
industry. Messrs. Delberg and Schweger will continue as senior
executives of BGS and oversee its expansion and integration with
Net1. We believe that the expertise and experience of BGS' senior
management will greatly assist us in our global expansion
initiatives. -- Accelerating the rollout of UEPS in Russia and
other new territories. There is little geographical overlap in our
and BGS' operations and thus, the acquisition offers us the
opportunity to establish relationships in countries where we
believe there are exciting opportunities for the implementation of
our technology but where we have minimal current relationships. We
believe that having a local partner is important to the success of
international implementation of our systems. We further believe
that Sberbank, through its leading market position in Russia, can
offer Net1 its extensive business network to implement our complete
suite of products there and will be motivated to do so by virtue of
its continued participation as a shareholder in BGS. 5. How was the
acquisition of BGS financed? We obtained a $110 million six-month
bank loan facility to fund the cash portion of the purchase price
for the BGS acquisition. We were entitled to settle the full
facility at any time during the six-month period without incurring
a prepayment penalty. During the three months ended September 30,
2008, we utilized approximately $103 million of this facility to
pay the cash portion of the purchase price, the $1.1 million
facility fee and transaction-related costs. The interest rate
charged on this facility was LIBOR plus 2.50%. We paid the lender
an upfront facility fee of $1.1 million and we have amortized the
facility fee over the period that the loan was outstanding.
Included in interest income, net for the three months ended
September 30, 2008, is $0.7 million related to the facility fee.
The remaining $0.4 million will be expensed during the three months
ended December 31, 2008. On October 16, 2008, the Company used
internally generated funds to repay the loan in full and all
collateral security arrangements were terminated. Our secondary
listing on the JSE provided us with the ability to utilize a
substantial portion of our South African cash reserves to settle
the loan. In anticipation of the listing and the subsequent
repayment of the loan, we hedged the currency risk by investing the
South African Rands earmarked for the loan repayment in a 32 day
deposit account in Luxembourg. The subsequent depreciation of the
Rand against the US dollar resulted in a realized foreign exchange
gain of ZAR 248.1 million, of which we recognized ZAR 48.8 million
as an unrealized gain during the first quarter. 6. Why did Net1
obtain a secondary listing on the JSE? The main purposes for our
listing on the JSE were to: -- enhance South African investors'
awareness of us, thereby enlarging our potential investor base and
increasing trade in our shares; -- provide ourselves with an
additional source from which capital to facilitate growth can be
obtained; -- optimize and simplify our capital structure by
eliminating the linked units; -- enable us to externalize our South
African reserves when required; -- externalize our South African
reserves without incurring significant leakage; -- facilitate
direct investment in our common stock by South African residents
and the investors utilizing the trading platform operated by the
JSE; and -- create additional liquidity for current South African
investors. As a result of our listing on the JSE our shareholders
are now able to trade their share of common stock on the Nasdaq
Global Select Market, or Nasdaq, and the JSE. During the first
quarter of fiscal 2009, we incurred expenses of approximately $0.4
million related to our inward listing on the JSE. 7. Has the
volatility in the global equity and credit markets affected your
business prospects? No. We have sufficient cash reserves and
financing arrangements to continue our current business activities.
We do not share the prevailing negative global sentiment towards
emerging markets as our technology is focused on these territories
and remains in demand, especially when the weaknesses of
traditional banking systems have become patently clear. Significant
weakness in our share price caused by the prevailing market
conditions could, however, have an impact on our ability to pursue
certain acquisitions that may accelerate our global expansion. 8.
How do you forecast growth in the beneficiary numbers in your
social welfare payment business? There are no official beneficiary
growth forecasts. We forecast beneficiary numbers using the
budgeted expenditure on social welfare grants provided in the South
African government's budget, taking into account that the amount
budgeted for is a function of beneficiary numbers, as well as the
average amount paid to each beneficiary class. Based on past
experience and an analysis of the information at hand, we
anticipate beneficiary growth of approximately 6% per annum. The
growth in beneficiary numbers is fairly "lumpy" and is influenced
by factors such as the government's marketing and registration
programs and the time taken by SASSA to process new grant
applications. 9. What is the status of the wage payment system
implementation with Grindrod Bank? We officially launched the wage
payment system in the KwaZulu-Natal province on May 12, 2008 and we
have successfully implemented several systems with smaller
employers in the area, mainly in the agricultural sector. During
the first quarter of fiscal 2009, we entered into an agreement with
our first major corporate customer to utilize the wage payment
system. Our customer is the largest provider of security and
guarding services in South Africa and employs approximately 20,000
people. We commenced with the registration process during the
second quarter of fiscal 2009 and we expect to complete the
enrollment of all employees by the end of the third quarter of
fiscal 2009. 10. What is the size of the market opportunity for the
wage payment system and how successful will Net1 and Grindrod Bank
be in penetrating this market? The target markets for the wage
payment system are the un-banked and under-banked wage earners in
South Africa, estimated at five million people. These wage earners
are typically paid in cash on a weekly, bi- weekly or monthly basis
and have all the risks associated with cash payments, but none of
the benefits associated with having a formal bank account. Net1 and
Grindrod Bank plan to offer these wage earners a UEPS smart card
that will allow the card holder to receive payment, transact and
access other financial services in a secure, cost-effective way. We
market the wage payment system to medium and large employers and to
trade unions. The value proposition presented to employers focuses
on the following key features: -- Safety - Security risks
associated with cash transportation and short-payment disputes are
eliminated; -- Cost-effectiveness - Our wage payment solution is
significantly cheaper than the current cost to employers of
preparing and distributing cash pay packets; -- Improved
productivity - Our solution obviates the need to set aside valuable
production time to physically pay employees; and -- Convenience -
With our system, wages can be distributed off-line at any time, and
financial products, such as cash advances, can be offered to the
employee without placing any administrative burden on the employer.
Our value proposition to unions and employees has the following key
elements: -- Safety - The personal safety risk of carrying cash is
eliminated; -- Security - Our smart cards can only be used in
conjunction with biometric verification and are completely loss
tolerant - no money is lost if the card is lost or stolen; --
Convenience - Our cards can be used at any participating retailer
or service provider at any time. Card holders can obtain cash from
any participating retailer, eliminating the need to search for an
available ATM; -- Cost effectiveness - Our solution is
significantly cheaper than any other bank product, as we recover
our fees mainly from employers, merchants and service providers;
and -- Access to credible and affordable facilities, such as money
transfers, loans, interest paying savings, life insurance and third
party payments. 11. Can you provide an update on the Ghana
contract? During the first quarter of fiscal 2009 we continued with
the delivery of hardware including POS devices and the remaining
smart cards under our contract with the Bank of Ghana. In addition,
we commenced delivery of smart cards and ATMs under additional
purchase orders we received. During the first quarter of fiscal
2009 we delivered hardware, including smart cards and terminals, to
the Bank of Ghana and recognized revenue of approximately $3.9
million (ZAR 30.4 million). 12. What is the status of the UEPS
deployment in Iraq? The first UEPS transaction was performed in
August 2008, in Baghdad, Iraq, during the official launch of the
UEPS smart card technology with the two state banks that are part
of the consortium to which we are providing a customized UEPS
banking and payment system. Our first project in Iraq is a pilot
involving 100,000 beneficiaries. The pilot calls for implementation
of our UEPS technology across selected bank branches and will
enable the distribution and payment of government grants to war
victims and martyrdom beneficiaries, as well as salary and wage
distribution and payment to employees of the two banks.
Approximately 40,000 beneficiaries have been registered and issued
with UEPS cards to date. We expect to generate revenue in the
second quarter of fiscal 2009. Under the agreement, we will receive
ongoing transaction and license fees, as well as payments for the
provision of outsourcing services and the sale of hardware. 13.
What is VTU and how does the revenue model work? VTU, or Virtual
Top Up, facilitates mobile phone-based pre-paid airtime vending.
The VTU technology enables prepaid cell users to purchase
additional airtime simply, securely and conveniently through the
distribution of airtime value from a vendor's cellular handset to
that of the customer, as opposed to through the use of a voucher.
We derive revenue from the sale of VTU licenses to mobile operators
and we have recently established VTU businesses in Colombia and
Vietnam, where we are minority shareholders in companies that
provide a VTU service to prepaid cell phone users. These businesses
generate revenue by charging a percentage of the value of the
airtime distributed through VTU. Our business in Colombia has
demonstrated the following growth since April 2008: Apr-08 May-08
Jun-08 Jul-08 Revenues (COP '000) 456,162 561,689 719,641 1,088,377
Percentage growth (month on month) 23% 28% 51% Number of
transactions 67,973 83,646 105,983 166,009 Percentage growth (month
on month) 23% 27% 57% Aug-08 Sep-08 Oct-08 Revenues (COP '000)
1,304,821 1,469,685 2,006,000 Percentage growth (month on month)
20% 13% 36% Number of transactions 226,475 281,927 400,000
Percentage growth (month on month) 36% 24% 42% The average exchange
rate during the seven months ended October 31, 2008 was US$ 1: COP
1919 14. What are your new patents for mobile payments all about?
Our latest patents incorporate our UEPS and SIM card expertise into
a system that will seamlessly bridge mobile phones to existing
payment infrastructures such as ATMs, POS devices, the Internet and
voice channels. The application of these patents will allow any
mobile phone user to effect payments that are generally referred to
as "card not present" payments completely securely, through the
utilization of a once off, disposable, virtual credit or debit
card. 15. What is the "pre-funded social welfare grant receivable"
line item on the balance sheet? We have a unique cash flow cycle
due to our obligations to pre-fund the payments of social welfare
grants in the KwaZulu-Natal and Eastern Cape provinces. We provide
the funds required for the grant payments on behalf of these
provincial governments from our own cash resources and are
reimbursed within two weeks by the KwaZulu-Natal and Eastern Cape
governments, thus exposing ourselves to these provinces' credit
risk. In addition, through our merchant acquiring system, we may
also pre-fund social welfare grants in the provinces where we
operate. These obligations result in a peak funding requirement, on
a monthly basis, of approximately $48.9 million (ZAR 340 million)
for each of the KwaZulu-Natal and Eastern Cape contracts. The
funding requirements are at peak levels for the first three weeks
of every month during the year. The pre-funded social welfare grant
receivable line also includes funding provided to certain merchants
participating in our merchant acquiring system. This funding is
provided in order to provide liquidity during the peak payment
periods of the month (usually the first week of the pay cycle)
because the payment of social welfare grants on our behalf places a
burden on the merchant's cash resources. In cases where the
merchant is not provided pre-funding during the payment cycle it is
reimbursed within 48 hours of the payment of the social welfare
grant on our behalf. The amount paid as social welfare grants by
the merchants on our behalf are available almost immediately from
the provincial governments in the Limpopo, North West and Northern
Cape provinces and within two weeks from the KwaZulu-Natal and
Eastern Cape provincial governments because we pre-fund these two
provinces. The actual quantum of Net1's cash reserves should be
evaluated by regarding this highly liquid, very short-term
receivable as a near-cash equivalent. 16. How are you growing the
management team? During the last year, we made significant progress
in strengthening the Net1 management team. Also, our recent
acquisition of BGS provides us with two executives with long
experience in the smart card industry and additional IT
professionals to strengthen the Net1 research and development
environment. We have appointed three senior managers to assist
Brenda Stewart, our senior vice-president of marketing and sales
with project management, marketing and implementation activities on
a global basis. We have also appointed a senior manager to oversee
the established activities of our international and SmartSwitch
operations and we have created an investment forum to consider all
aspects of prospective investments in new territories. Our finance,
administration, human resources, compliance and treasury functions
are growing continuously to provide a high level of support to the
group. Our vice president - investor relations recently resigned
but we are actively seeking a replacement to address shareholder
queries and improve our investor relations function. Finally, we
have restructured and strengthened our operations teams to ensure
ongoing effective management of our South African social welfare
and wage payment activities. We are committed to growing the Net1
management team to ensure that we are able to capitalize on the
myriad of opportunities we are presented with on an ongoing basis.
17. You are highly cash generative and show a strong cash balance
on your balance sheet, why do you not return some of this money to
shareholders? We have not paid any dividends on our shares of
common stock during our last two fiscal years and presently intend
to retain future earnings to finance the expansion of the business.
We do not anticipate paying any cash dividends in the foreseeable
future. The future dividend policy will depend on our earnings,
capital requirements, expansion plans, financial condition and
other relevant factors. We may also consider share buy-backs from
time to time, depending on the prevailing market conditions. 18.
What effect will the proposed abolishment of Secondary Taxation on
Companies in South Africa have on Net1? On February 21, 2007, the
South African Minister of Finance announced in his National Budget
speech that the National Government intends to phase out Secondary
Taxation on Companies, or STC, and introduce a dividend tax at a
shareholder level. Currently, South African companies are required
to pay STC at a rate of 10.00% on dividends distributed, subject to
certain exemptions. If a dividend tax is introduced South African
companies will no longer be liable to pay STC and the shareholder
will be liable to pay the dividend tax. Treaty relief would be
available for foreign shareholders. The reform is being implemented
in two phases. The first phase entailed a reduction of the STC
rate, effective October 1, 2007, to 10.00% and the second phase,
now expected in calendar 2010 will result in a total conversion to
a dividend tax. It is likely that South African companies will be
required to withhold the dividend tax on all dividends paid. We can
not reasonably determine whether the second phase will be enacted
as proposed and we will comply with that new tax legislation once
it has been enacted. If the announcements made by the South African
Minister of Finance in his National Budget speeches regarding the
second phase are enacted, under current enacted tax legislation, we
expect the proposed replacement of STC with a dividend tax to
reduce our current fully distributed rate of 34.55% to 28%. Under
US GAAP, we apply the fully distributed tax rate of 34.55% to our
deferred taxation assets and liabilities. We have not yet
determined whether we would qualify for the treaty relief available
to foreign shareholders. 19. What effect did the change in the
South African tax rate from 29% to 28% have on your first quarter
of fiscal 2009 results? The change in tax rate was promulgated on
July 22, 2008. Our fully distributed tax rate was reduced to 34.55%
from 35.45% during the first quarter of fiscal 2009 and has
resulted in an income tax benefit included in our income tax
expense line of $3.5 million. DATASOURCE: Net 1 UEPS Technologies,
Inc. CONTACT: William Espley of Net1 Investor Relations,
+1-604-484-8750, or Toll Free, +1-866-412-NET1 (6381) Web site:
http://www.net1ueps.com/
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