The Daily Magic Formula Stock for 09/26/2008 is Net 1 Ueps Technologies Inc. According to the Magic Formula Investing Web Site, the ebit yield is 9% and the EBIT ROIC is >100 %.
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We provide our universal electronic payment system, or UEPS, as an alternative payment system for the unbanked and under-banked populations of developing economies. We believe that we are 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, we have 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 our system can enter into transactions at any time with other card holders in even the most remote areas so long as a smart card reader, which is often portable and offline, is available. In addition to payments and purchases, our system can be used for banking, health care management, international money transfers, voting and identification.
We generate our revenues by charging transaction fees to government agencies, employers, merchants, retailers, petroleum suppliers and other financial service providers, by providing financial services such as loans and insurance products and by selling hardware, licensing software and providing related technology services including secure online transaction processing, cryptography and integrated circuit card (chip/smart card) technologies. Our technology is widely used in South Africa today, where we have over 4.0 million clients in five provinces who receive social welfare grants using our smart cards and increasingly use their smart cards at participating merchants to receive and spend their grants. In addition, our technology has been selected and implemented by the Central Bank of Ghana as the common electronic payment platform in Ghana and we are in the process of completing a project to provide a consortium in Iraq with a customized UEPS banking and payment system that we will operate on an outsourced basis. As part of our strategy to expand into new geographical markets we have formed joint ventures in Namibia and Botswana to operate UEPS smart card-based switching systems in those countries and in Colombia and Vietnam to implement and operate virtual top-up, or VTU, solutions for mobile phone-based prepaid airtime vending. As these UEPS systems become operational, we generate revenues from sales of equipment, software and related technology to the joint ventures and from our share of the revenues earned by the ventures from operation of the switching systems.
We are headquartered in Johannesburg, South Africa. Net 1 UEPS Technologies, Inc. was incorporated in 1997 as a Florida corporation and is the successor to operations originally begun in 1989. Under â€ś-Corporate Historyâ€ť below, we describe the historical development of our business, including the June 2004 acquisition of Net1 Applied Technologies Holdings Limited, or Aplitec, which was a South African public company. All references to â€śNet1,â€ť â€śthe Company,â€ť â€śwe,â€ť â€śus,â€ť or â€śourâ€ť are references to Net 1 UEPS Technologies, Inc. and its consolidated subsidiaries, collectively, except as otherwise indicated or where the context indicates otherwise.
On August 27, 2008, we acquired 80.10% of BGS Smartcard Systems AG, or BGS, an Austrian private company that provides smart card-based payment systems to banks, enterprises and government authorities in Russia, Ukraine, Uzbekistan, India and Oman. See â€śItem 7. Managementâ€™s Discussion and Analysis of Financial Condition and Results of Operationsâ€”Trends and Material Developments Affecting our Businessâ€”Acquisition of BGS Smartcard Systems AG.â€ť
According to the United States Census Bureau, the worldâ€™s population currently exceeds 6.7 billion people. Yet of this total, it has been reported that over four billion people earn less than the purchasing parity equivalent of two dollars per day. In general, these people either have no bank account or very limited access to banking services. This situation arises when banking fees are too high relative to an individualâ€™s income, a bank account provides little or no meaningful benefit or there is insufficient infrastructure to provide banking services economically in the individualâ€™s geographic location. We refer to these people as the unbanked and the under-banked. These individuals generally receive wages, welfare benefits, money transfers or loans in the form of cash and conduct commercial transactions, including buying food and clothing, in cash.
The use of cash, however, presents significant problems. In the case of recipients, they generally have no secure way of protecting their cash other than by converting it immediately into goods, carrying it with them or hiding it. In cases where an individual has access to a bank account, the typical deposit, withdrawal and account fees meaningfully reduce the money available to meet basic needs. For government agencies and employers, using cash to pay welfare benefits or wages results in significant expense due to the logistics of obtaining that cash, moving it to distribution points and protecting it from theft.
The use of cash or lack of access to a bank account can dramatically increase the cost to, and in some cases completely prevent, individuals from engaging in basic financial transactions. These basic transactions include the routine payment of insurance premiums, the transfer of money to relatives and the use of credit. Without a bank account, it is also difficult for an individual to obtain a loan on attractive terms since that individual lacks a credit history and usually cannot present a reliable means of repayment to the lender.
For governments, assistance programs face significant challenges when dependent on the use of cash. In addition to the costs and difficulties of using cash, corruption becomes an even more challenging problem since there is no clear audit trail. In fact, the absence of an electronic system for the distribution of goods, including foodstuff or medicine, or welfare benefits presents a significant obstacle to ensuring the fair and reliable implementation of government policy or deployment of foreign aid.
Traditional payment systems offered today by the major banking institutions do not address the key requirements of the unbanked and the under-banked populations. In addition to the high cost of maintaining a bank account relative to a customerâ€™s income level, customers must generally have basic literacy, administrative and record-keeping abilities and a minimum income level. Additionally, banks operate through online transaction settlement systems, which are often unavailable or costly to implement in undeveloped areas. Finally, having a bank account does not eliminate the need for significant quantities of cash in many instances because customers must withdraw large sums at one time to avoid incremental transaction fees.
We believe that we are the first company to enable the affordable delivery of financial products and services to the worldâ€™s unbanked and under-banked people. Our approach takes full advantage of moving processing away from a centralized point to the computer chip embedded on a smart card. A smart card reader, or POS device, is used to enable communication between smart cards in real-time during a transaction and indirectly with our mainframe computer at a later time. This architecture has significant implications in terms of the products and services that we can deliver compared to those offered by banking institutions or other card providers.
First, our system enables offline transactions, which is essential in serving the unbanked and under-banked. Second, it means that while offline, the smart card can engage in sophisticated transaction processing, using data encryption and biometric fingerprint protection to ensure security. In fact, our smart cards can calculate the interest owed to the card holder for having funds recorded onto our system without ever coming online. Third, with all of the software and transaction records on the smart card, the POS device itself requires far fewer components, circuitry and memory, substantially reducing costs. Fourth, each transaction is recorded on both participating smart cards, copied in subsequent transactions to additional smart cards, and ultimately reported to our mainframe computer. This creates a full audit trail that significantly reduces the potential for corruption, theft and fraud. Lastly, instead of having to build the overall system to handle peak loads, our system further reduces costs by smoothing the transaction flow over time.
We believe that our solution delivers benefits to each of the users of our system, including:
Individuals. There is no minimum income requirement for individuals to use our smart card, making our solution universally accessible. It is also inexpensive since the overall cost of the system is much less than widely available solutions, including cash, bank accounts and bank cards that require online access. Our solution additionally has the advantage of working everywhere, including remote areas where many unbanked and under-banked people live. Even more importantly, our solution is secure and smart cards are replaceable. This means that individuals do not have to fear that their money will be stolen or that they will be charged for fraudulent transactions as all transactions are verified biometrically through fingerprints. Since the smart card performs all of the required computing processing and contains all of the different service features, the smart card can be tailored to meet the needs of the individual. Card holders can also receive interest on their card balances, a benefit not available to them when transacting solely in cash. We believe our solution has the potential to enhance significantly the living standards of the unbanked and under-banked by reducing transaction costs and providing them with new and additional financial products and services.
Merchants and Financial Service Providers . Merchants derive several different benefits from our system. Our system decreases the amount of cash they must hold, improving security and reducing expenses, such as cash deposit fees and cash losses. By providing financial services through our POS devices, merchants also benefit from new income streams at no additional incremental cost. In addition, our system provides a record of transactions that is useful for administrative purposes. For formal financial service providers, the use of smart cards provides opportunities to directly sell products and services to a market that was previously difficult to reach. For instance, insurance companies can offer their products with the premium deducted directly from the individualâ€™s smart card. In the case of lending, administrative costs are decreased along with the expense of holding cash. Again, the collection of payments can occur directly from the smart card, reducing credit risk and helping to establish credit history.
Employers . Our system enables employers to eliminate cash from the wage payment process. This reduces expenses by avoiding cash handling and management, the need to insure, secure and transport that cash and the bank transaction fees associated with obtaining cash in the first place. The process of paying employees using cash is also time consuming, taking up to half a day per pay period in some instances. The use of our system eliminates this process and thereby increases productivity. In addition, because cash payments are distributed in packets to employees, disputes can arise as to the amount of cash in the packet. Our system also eliminates this problem since the amount reflected on the card holdersâ€™ accounts are recorded on the back-end system and then distributed on the smart cards. Finally, employers frequently provide additional services to their employees out of necessity, particularly loans. Our system enables other service providers to deliver these products.
Government Agencies. A fundamental policy goal for almost any government is to enhance the welfare of the poorest citizens in the country. Yet the use of cash is a poor method for delivering social welfare grants since it is difficult to track, and the recipients endure a range of expenses and dangers that reduce their options. By using our system, government agencies enjoy reduced costs in the delivery of benefits to recipients by eliminating the use of cash while increasing the options available to the recipient. This use of our system intrinsically increases the welfare that government agencies can provide from the same amount of taxes collected. Our system also has the potential to increase the amount of taxes collected by bringing informal businesses into the formal economy. The presence of a full audit trail also means that government agencies can combat corruption. Moreover, the use of smart cards for the delivery of additional services, including insurance products, means that regulatory bodies can expand their oversight of transactions for individuals who are frequently least able to protect themselves. In regard to medical benefits, our system provides comprehensive inventory management and has the potential to improve the treatment of patients significantly.
Our Business Strengths
We believe our business strengths include:
Technology Leadership . We believe we are the first company to develop, implement and operate an affordable, flexible and secure electronic payment system for the unbanked and under-banked that works offline. Of equal importance, our smart cards are secured through biometric fingerprint authentication and have a broad range of additional functionality through the use of â€śwalletsâ€ť that can be turned on as needed or as services become available. We can deliver these services to the unbanked population at a fraction of the cost of traditional systems. Our ability to implement an HIV/AIDS system on the same smart card as financial services demonstrates the flexibility of our approach. In addition, we have validated the security of our smart cards along with our overall system, forming the foundation for a trusted solution. Independent third parties have reviewed and published our security protocols and we have refined our system in a way to provide system integrity over the life of the smart cards. From our inception in 1989 to date, we have not suffered any security breaches or losses of transactions or funds on our system. In addition, our acquisition of Prism gave us access to well-established core cryptography, software, hardware, embedded chip, wireless and payment expertise.
Proven Solution. Our system is proven is widely used. Today over 4 million clients in South Africa receive monthly welfare or pension payments through our system under contracts with five provinces. Historically, welfare and pension recipients would only download cash from smart cards, but since we began our merchant acquiring initiative in July 2004, these recipients increasingly choose to use their smart cards at merchant locations, which generate additional revenues for us. During the year ended June 30, 2008, the number of our clients that opted to receive their grants through our retail infrastructure grew to approximately 1,426,000, an increase from approximately 1,129,000 and 849,000 during fiscal 2007 and 2006, respectively. For the years ended June 30, 2008 and 2007, the total value of transactions processed through our UEPS merchant network was approximately $1,078 million and $875 million, respectively. As of June 30, 2008, we had 4,394 POS devices installed at 2,454 participating retail merchants compared to June 30, 2007, when we had 4,357 POS devices installed at 2,598 participating retail merchants
Versatile Application. Once an individual begins using our smart card, we become a logical provider of a broad range of additional products and services. For instance, a card holder using our system for the administration of medical treatment can also use the same smart card for receiving welfare payments or wages as well as making purchases. Because use of each smart card is secured biometrically, the smart card can also be used for identification and voting. The additional uses mean that once we have enrolled and delivered a smart card to an individual, our revenue potential increases significantly beyond the initial service for which that individual has signed up.
Broad Appeal that Drives Opportunities. Because our system provides economic benefits to all participants, we believe there are strong incentives for government agencies and employers to adopt our system in many developing countries. Our solution is also appealing because a single deployment enables the delivery of a broad array of new services to those who are potentially most in need of them, often at a lower cost than alternative distribution methods.
Increasing Returns to Scale . The initial establishment of our system in a province or country requires upfront expenditures for computers, distribution infrastructure and card holder registration. Once in place, though, the cost to us of supplying additional products to users is low. For instance, if a customer receives welfare payments on one of our smart cards and then chooses to purchase insurance through our system, there is almost no additional expense for us to deduct the insurance premium regularly. As a result, the operating margin for that customer increases significantly, offset only by any marketing or administrative costs associated with that product.
We intend to provide the leading system for the worldâ€™s estimated four billion unbanked and under-banked people to engage in electronic transactions globally. To achieve this goal, we intend to pursue the following strategies:
Disciplined Approach to New Markets . We carefully evaluate new opportunities in order to deploy our business development resources effectively. We believe there are significant opportunities for our system in the developing countries of Africa, Central and South America, the Middle East, the Asia-Pacific Rim and Central and Eastern Europe, where the unbanked and under-banked comprise a majority of the population. Where we believe it makes sense, we will use partnerships or make acquisitions to accelerate our entry into new markets. For instance, during our 2007 and 2006 fiscal year, we established, together with local investors, companies to create and implement UEPS systems in three African countries, Namibia, Botswana and Nigeria. In other instances we may implement UEPS systems in a particular market. For instance, during fiscal 2008 we implemented a National Switch and Smart Card Payment System in Ghana and we entered into a contract with an Iraqi consortium to provide a customized UEPS banking and payment system that we will operate on an outsourced basis.
Unlock Target Markets with a Key Product . The first step in establishing our system within a new province or country is to establish a broad base of smart card users around a single application. One of our preferred routes is to secure contracts to implement payment systems for government programs having large numbers of potential card holders. We believe another effective route will be the delivery of medical management applications, such as for HIV/AIDS. However, we are not dependent on government agencies to establish an initial base. In South Africa, employers have examined our system to address their wage payment challenges and we are currently pursuing opportunities to deliver this solution. Similarly, banking institutions implement the UEPS banking application and distribute smart cards to their clients to replace ageing legacy systems, including paper or book- based systems.
Expand Our Products Within the Markets We Serve . With the establishment of a strong base of card holders and related infrastructure, we can then move to providing additional products and services. As part of broadening our card holdersâ€™ options, we will also sell our smart card readers and POS devices to merchants to enable them to enter into transactions. Additionally, we will work to establish relationships with post offices, banks and other financial service providers with the goal of making our system ubiquitous in the markets we serve.
Provide Products and Services Ourselves Where the Profit Potential is Compelling . Our system can dramatically reduce transaction costs and improve data collection for a broad set of products and services. We intend to offer those products and services ourselves where the profit potential is significant. For instance, we engage in lending in South Africa. We are able to offer this service at a lower interest rate than competitors due to our ability to deduct interest and principal directly from a borrowerâ€™s smart card and our knowledge of that individualâ€™s payment history.
Establish Partnerships or Make Acquisitions When Appropriate . As part of our disciplined approach to growing our presence globally, we will evaluate and enter into partnerships or outsourcing agreements where we can draw on local knowledge and infrastructure to drive the rapid adoption of our system. We believe that this will enable us to focus on our core strength in technology as well as product development and delivery. In some instances, we will make acquisitions where we believe that our approach will enable us to gain customers and realize operational benefits rapidly from the deployment of our more efficient solution.
We developed our technology to enable the affordable delivery of financial products and services to the worldâ€™s unbanked and under-banked people. Our proprietary technology is designed to provide the secure delivery of these products and services in the most under-developed or rural environments, even in those that have little or no communications infrastructure. Unlike a traditional credit or debit card where the operation of the account occurs on a centralized computer, each of our smart cards effectively operates as an individual bank account for all types of transactions. All transactions that take place through our system occur between two smart cards at the point of service, or POS, as all of the relevant information necessary to perform and record transactions reside on the smart cards.
The transfer of money or other information can take place without any communication with a centralized computer since all validation, creation of audit records, encryption, decryption and authorization take place on, or are generated between, the smart cards themselves. Importantly, the cards are protected through the use of biometric fingerprint identification, which is designed to ensure the security of funds and card holder information. Transactions are generally settled by merchants and other commercial participants in the system by sending transaction data to a mainframe computer on a batch basis. Settlements can be performed online or offline. The mainframe computer provides a central database of transactions, creating a complete audit trail that enables us to replace lost smart cards while preserving the notional account balance, and to identify fraud.
Dr. Serge C.P. Belamant
54 years old
Director since 1997
Chairman and Chief Executive Officer
Dr. Serge C.P. Belamant has been our chief executive officer since October 2000 and the chairman of our Board since February 2003. From June 1997 until June 2004, Dr. Belamant served as chief executive officer and a director of Net 1 Applied Technology Holdings, or Aplitec, whose business was acquired by Net 1 in June 2004. From 1996 to 1997, Dr. Belamant served as a consultant in the development of Chip Off-Line Pre-Authorized Card, which is a Visa product. From October 1989 to September 1995, Dr. Belamant served as the managing director of Net 1 (Pty) Limited, a privately owned South African company specializing in the development of advanced technologies in the field of transaction processing and payment systems. Dr. Belamant also serves on the boards of a number of other companies that perform welfare distribution services and the provision of microfinance to customers. Dr. Belamant spent ten years working as a computer scientist for Control Data Corporation where he won a number of international awards. Later, he was responsible for the design, development, implementation and operation of the Saswitch ATM network in South Africa that rates today as the third largest ATM switching system in the world. Dr. Belamant has patented a number of inventions besides the FTS patent ranging from biometrics to gaming-related inventions. Dr. Belamant has more than 27 years of experience in the fields of operations research, security, biometrics, artificial intelligence and online and offline transaction processing systems. Dr. Belamant holds a PhD in Information Technology and Management.
Herman Gideon KotzĂ©
38 years old
Director since 2004
Chief Financial Officer, Secretary and Treasurer
Herman Gideon KotzĂ© has been our chief financial officer, secretary and treasurer since June 2004. From January 2000 until June 2004, he served on the board of Aplitec as Group Financial Director. In mid-1997 until October 1998, Mr. KotzĂ© worked for the Industrial Development Corporation of South Africa Limited as a business analyst. Mr. KotzĂ© served his articles from 1994 to 1996 at KPMG in Pretoria, South Africa, and in 1997 he became the audit manager for several major corporations in the manufacturing, mining, retail and financial services industries. Mr. KotzĂ© joined Aplitec in November 1998 as a strategic financial analyst. Mr. KotzĂ© is a member of the South African Institute of Chartered Accountants.
Christopher Stefan Seabrooke
54 years old
Director since 2005
Chief Executive Officer of Sabvest Limited
Christopher Stefan Seabrooke has been a member of our Board since January 2005. Mr. Seabrooke has served on the board of directors of over twenty listed companies. Mr. Seabrooke is currently on the board of directors of the following five JSE Limited listed companies â€“ chief executive officer of Sabvest Limited, a finance and investment group, non-executive chairman of Metrofile Holdings Limited and Setpoint Technology Holdings Limited, non-executive deputy chairman of Massmart Holdings Limited and a non-executive director of Datatec Limited, which is also listed on AIM in the UK. Mr. Seabrooke is a member of The Institute of Directors in South Africa. Formerly, he was the chairman of the South African State Theater and the deputy chairman of each of the National Arts Council and the Board of Business and Arts South Africa. Mr. Seabrooke has degrees in Economics and Accounting from the University of Natal and an MBA from the University of Witwatersrand.
Antony Charles Ball
48 years old
Director since 2004
Chief Executive Officer of Brait Group
Antony Charles Ball has been a member of our Board since June 2004. Mr. Ball has held various senior leadership positions with the Brait Group, or Brait, since 1998 and has been the chief executive officer of Brait since October 1, 2006. Mr. Ball has led the raising and governance of a number of Braitâ€™s private equity funds and is responsible for certain of its private equity investments. Prior to assuming his current position at Brait, Mr. Ball served as joint deputy chairman of Brait from 1998 to March 2000. Prior to joining Brait, Mr. Ball was the chief executive of Capital Partners, which was the predecessor company to Brait and which pioneered the private equity market in South Africa, from 1991 to 1998. Mr. Ball began his career with Deloitte & Touche Consulting (1986-1991), where he co-founded its Strategy Group. Mr. Ball is a member of the board of Brait S.A. and its subsidiaries. Mr. Ball has been designated as a director by South African Private Equity Fund III, L.P., an affiliate of Brait, or SAPEF, pursuant to a contractual arrangement.
Alasdair J. K. Pein
47 years old
Director since 2005
Director of Southern Cross Capital UK Limited
Alasdair Jonathan Kemsley Pein has been a member of our Board since February 2005. Mr. Pein is a director of Southern Cross Capital UK Limited, which manages investment funds for Brenthurst Limited, an investment holding company for the Oppenheimer family interests. From 1994 until2002, Mr. Pein was President and CEO of Task (USA), Inc., a New York-based investment company. Mr. Pein also serves as a director of Arsenal Digital Solutions, a privately-held U.S. company that provides on-demand data protection services. Between 1989 and 1994, Mr. Pein worked in London for Bankers Trust International mergers and acquisitions team and then at Gilbert Elliot Corporate Finance. Mr. Pein is a qualified South African chartered accountant and completed his articles with Deloitte & Touche (South Africa) in Johannesburg in 1987. Mr. Pein has been designated as a director by SAPEF pursuant to a contractual arrangement.
53 years old
Director since 2005
Executive Chairman of Merryn Capital
Paul Edwards has been a member of our Board since July 2005. Mr. Edwards is the executive chairman of Merryn Capital, a privately-owned financial services group. From 2002 to 2005, Mr. Edwards was executive chairman of Chartwell Capital Group. In January 2005, Mr. Edwards was appointed non-executive chairman of Starcomms Limited, a Nigerian telecommunications operator. Prior to that, Mr. Edwards was the chief executive officer of MTN Group, a pan-African mobile operator. Between 1999 and 2001, Mr. Edwards was the chief executive officer of the Johnnic Group in South Africa, of which the MTN Group was a subsidiary. Between 1995 and 1999, Mr. Edwards was the chief operating officer of MEASAT Broadcast Network, a Malaysian-based regional pay television operator. Between 1993 and 1995, Mr. Edwards was executive vice president of satellite television broadcaster Star TV, based out of Hong Kong. Between 1989 and 1993, Mr. Edwards was chief executive officer of Multichoice, Africaâ€™s leading pay television operator. Mr. Edwards has a BSc and an MBA from the University of Cape Town.
Florian P. Wendelstadt
40 years old
Director since 2005
Managing Director of General Atlantic LLC
Florian P. Wendelstadt has been a member of our Board since August 2005. Mr. Wendelstadt has been a Managing Director of General Atlantic LLC, or GA, a global private equity firm that provides capital for growth companies driven by information technology or intellectual property, since December 2000. Mr. Wendelstadt also serves as a director of Liberata Limited, TorexRetail Ltd, Global Collect NV and Saxo Bank A/S. Mr. Wendelstadt has a BA in Economics from Passau University in Germany and a MBA from the European School of Management. Mr. Wendelstadt serves as a director on our Board pursuant to a contractual arrangement between us and investment entities affiliated with GA pursuant to which GA is entitled to designate one person to serve on our Board.
MANAGEMENT DISCUSSION FROM LATEST 10K
We provide our universal electronic payment system technology as an alternative payment system to the un-banked and under-banked populations of developing economies. We believe that we are 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 effect affordably electronic transactions with one another, government agencies, employers, merchants and other financial services providers. To do this, we have developed and deployed the universal electronic payment system, or 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 our system can enter into transactions at any time with other card holders in even the most remote areas so long as a portable offline card reader is available. In addition to payments and purchases, our system can be used for banking, health care management, international money transfers, voting and identification.
South Africa is the first major market where we achieved significant success and a high penetration rate in the areas we targeted. We believe that our operating experience in South Africa demonstrates the success of our business model in a developing economy. According to estimates published by Statistics South Africa, as of mid-2007, South Africa had a population of approximately 47.9 million people, of which an estimated 50% lived below the poverty line and, as of September 2007, the South African unemployment rate was estimated at approximately 23.0% . The success we have achieved in South Africa has primarily resulted from servicing the needs of the poorest section of the population â€“ those who are dependent on government social welfare grants. We have designed and implemented a complete business model involving the payment, and subsequent spending, of these grants through our smart cards and UEPS technology, which provides us with the opportunity to earn multiple sources of revenue and provides our card holders with affordable functionality and lifestyle improvement
In July 2004, we began a major drive to install POS devices at merchants located in rural areas where the majority of our card holders spend their social welfare grants. The ability of our card holders to load their grants at these retailers and to spend these grants securely on goods and services, without the need to withdraw the full amount in cash, represents one of the basic underlying principles of the UEPS functionality. We believe that the installation of these POS devices has resulted in a significant improvement in the lifestyle of our card holders, while introducing a new revenue source for us in the form of merchant acquiring and other transaction fees. Use of the POS devices also lowers our costs by reducing the amount of cash we need to deliver to social welfare beneficiaries in cash at our mobile paypoints. We discuss the progress of our merchant acquiring efforts since implementation of these efforts under â€śResults of Operationsâ€”Results of Operations by Operating Segmentâ€”Transaction-based Activitesâ€”Continued Adoption of Our Merchant Acquiring System.â€ť
The implementation of new UEPS systems, particularly in developing economies outside our current markets, is a vital component of our future growth. We have implemented or are in the process of implementing our systems on the African continent outside South Africa. During fiscal 2006, we formed joint ventures with government entities and financial institutions to operate UEPS smart card-based switching systems in Namibia, Botswana and Nigeria. During fiscal 2007 we were awarded the tender to provide Ghana with a National Switch and Smart Card Payment System, or e-zwich. We have substantially completed the initial phases of this project and the system was officially launched in April 2008. In addition, during fiscal 2008 we signed a contract with a consortium comprising the Iraqi government and local Iraqi banks for the use of our UEPS technology in Iraq. These joint ventures and projects, which are described in more detail under â€śâ€”International Expansion,â€ť are in various stages of development and operation.
In July 2006, we acquired Prism Holding Limited, or Prism, which owns EasyPay (Pty) Ltd, or EasyPay, the largest bank-independent financial switch, or transaction processor, in Southern Africa. The bulk of the 517 million transactions processed by EasyPay during fiscal 2008, on behalf of retailers, bill issuers and financial institutions were transacted through a base of approximately 50,000 customer-owned terminals, the majority of which are installed at all the retail locations of South Africaâ€™s two largest retailers, who have approximately 65% of the South African retail market share between them. The addition of the Prism merchant acquiring network will extend our footprint in South Africa from the deep rural areas, where we are active today, to the urban environment. We have commenced the upgrade, where appropriate, of the 50,000 terminals that formed part of Prismâ€™s network to accommodate our biometric-based UEPS technology, which will significantly enhance our wage payment program once we launch that service.
We believe that the acquisition of Prism has assisted us to extend our ability to deliver solutions across the entire spectrum of transaction processing and in expanding our international operations throughout Africa, Asia and Europe. The results of Prismâ€™s operations are reflected in our financial statements from July 3, 2006. We have also concluded strategic partnership and business opportunities across the Americas and Asia. For example, we have launched VTU solutions in Colombia and Vietnam.
In January 2007, we signed a co-operation agreement with Grindrod Bank Limited, or Grindrod Bank, a fully registered bank in South Africa, for the establishment of a retail banking division within Grindrod Bank that will focus on deploying our wage payment solution in South Africa. In May 2008, the first wage payments using our UEPS were made to employees in the KwaZulu-Natal province.
On August 27, 2008, we acquired 80.10% of BGS Smartcard Systems AG, or BGS, an Austrian private company that provides smart card-based payment systems to banks, enterprises and government authorities in Russia, Ukraine, Uzbekistan, India and Oman. See â€ťTrends and Material Developments Affecting our Businessâ€” Acquisition of BGS Smartcard Systems AG.â€ť
Sources of Revenue
We have structured our business and our business development efforts around four related but separate approaches to deploying our technology. In our most basic approach, we act as a supplier, selling our equipment, software, and related technology to a customer. As an example, in Ghana, we sold a complete UEPS to the Central Bank, which owns and operates the resulting transaction settlement system. The revenue and costs associated with this approach is reflected in our Hardware, software and related technology sales segment.
We have found that we have greater revenue opportunities, however, by acting as a service provider instead of a supplier. In this approach we own and operate the UEPS ourselves, charging one-time and on-going fees for the use of the system either on a fixed or ad valorem basis. This is the case in South Africa, where we distribute welfare grants on behalf of the provincial governments and employers on a fixed basis, but charge a fee on an ad valorem basis for goods purchased using our smart card. The revenue and cost associated with this approach are reflected in our Smart card accounts, Transaction-based activities and Financial services segments. Three of the provincial governments each provide more than 10 per cent of our total revenues and the loss of any one of these customers may have a material adverse effect on us. We have adopted a variation of this approach in Iraq, where we will operate a UEPS system on an outsourced basis on behalf of a consortium consisting of the Iraqi government and Iraqi Banks, in return for transaction fees based on the volume and value of transactions processed through the system.
Because our smart cards are designed to enable the delivery of more advanced services and products, we are also willing to supply those services and products where the profit potential is compelling. For instance, we act as a lender today. This is an example of the third approach that we have taken. Here we can act as the principal in operating a business that can be better delivered through our UEPS. We can also act as an agent, for instance, in the provision of insurance policies. In both cases, the revenue and costs associated with this approach are reflected in our Financial services segment.
Finally, we have entered into business partnerships or joint ventures to introduce our UEPS and VTU solutions to new markets such as Botswana, Namibia, Nigeria, Colombia and Vietnam. In these situations, we take an equity position in the business while also acting as a supplier of technology. In evaluating these types of opportunities, we seek to maintain a highly disciplined approach, carefully selecting partners, participating closely in the development of the business plan and remaining actively engaged in the management of the new business. In most instances, the joint venture or partnership has an exclusive license to use the UEPS in the specific territory, including the back-end system. We account for our equity investments using the equity method. When we equity-account these investments, we are required under US GAAP to eliminate our share of the net income generated from sales of hardware and software to the investee. We recognize this net income from these during the period in which the hardware and software is utilized in the investeeâ€™s operations, or has been sold to third party customers, as the case may be.
Fiscal 2008 Compared to Fiscal 2007
The following factors had a significant influence on our results of operations for the 2008 fiscal year as compared to the 2007 fiscal year:
* weakening of the ZAR, our functional currency, against the US dollar, our reporting currency, which had a negative impact on our revenues and net income in US dollars;
* settlement payment received from SASSA during fiscal 2007 which affects the comparability of revenue and net income between the periods due to the non-recurring nature of a substantial portion of that payment;
* increased revenues from price increases under all of our provincial contracts;
* increased number of grants paid in all provinces, particularly in the North West province;
* commencement of the contract to provide the Central Bank of Ghana with a National Switch and Smart Card Payment System utilizing our UEPS technology;
* increased revenues from continued adoption of our merchant acquiring system by cardholders;
* increased stock-based compensation charges resulting from restricted stock grants in fiscal 2008;
* increased interest income resulting from higher deposit rates and higher overall cash balances; and
* change in our fully distributed tax rate from 36.89% to 35.45%, which had a positive impact on our net income.
Consolidated overall results of operations
This discussion is based on the amounts which were prepared in accordance with US GAAP.
Analyzed in ZAR, the increase in revenue and cost of goods sold, IT processing, servicing and support for fiscal 2008, was primarily due to the higher volumes in our transaction-based activities, a greater number of UEPS-based smart card holders and the sale of hardware and the provision of software development and customization services to the Central Bank of Ghana.
Our overall operating income margin remained constant at 43% but varied by operating segment as discussed in further detail in our segment discussion below.
Cost of goods sold, IT processing, servicing and support during fiscal 2008 and 2007 includes a stock-based compensation charge of $0.2 million (ZAR 1.3 million) and $0.3 million (ZAR 2.0 million), respectively, related to options granted to employees. These amounts are net of adjustments resulting from forfeitures of $0.1 million (ZAR 1.1 million) and $0.2 million (ZAR 1.5 million), respectively.
Selling, general and administration expenses increased during fiscal 2008 from the comparable period in fiscal 2007 primarily due to the stock-based compensation charge related to the restricted stock grants awarded in the first and third quarters of fiscal 2008 and increases in goods and services purchased from third parties, including the effects of the increase in inflation in South Africa. Selling, general and administration expenses during fiscal 2008 and 2007 includes a stock-based compensation charge of $4.0 million (ZAR 29.2 million) and $0.6 million (ZAR 4.6 million), respectively, related to options and restricted stock granted to employees, executive officers and directors. These amounts are net of adjustments resulting from forfeitures of $0.1 million (ZAR 1.0 million) and $0.2 million (ZAR 4.4 million), respectively.
Our direct costs of maintaining a listing on Nasdaq as well as compliance with Sarbanes includes independent directorsâ€™ fees, legal fees, fees paid to Nasdaq, our compliance officerâ€™s salary, fees paid to consultants who assist with compliance with Sarbanes and fees paid to our independent accountants related to the audit and review process. This has resulted in expenditures of $1.9 million (ZAR 13.8 million) and $1.5 million (ZAR 10.8 million) during fiscal 2008 and 2007, respectively.
Depreciation and amortization includes the amortization charge related to the acquisition of Prism of $5.5 million (ZAR 39.8 million) and $5.4 million (ZAR 39.0 million), respectively, for fiscal 2008 and 2007. The deferred tax benefit included in our statement of operations related to the intangible amortization charge for fiscal 2008 and 2007 was $1.9 million (ZAR 13.9 million) and $2.0 million (ZAR 14.2 million), respectively. Property, plant and equipment acquired to provide administration and distribution services to our customers is depreciated over the shorter of expected useful life and the contract period with the provincial government. We are currently in an extension phase with all our contracts and the majority of our property, plant and equipment related to the administration and distribution of social welfare grants has been written off. Accordingly, depreciation expense related to these activities decreased during fiscal 2008, which was partially offset by the increase in depreciation of our participating merchant POS terminals. We expect our depreciation charge to increase during fiscal 2009 as a result of the acquisition of the latest generation Stratus backend processing computers for current and new operations, improvements to our smart card manufacturing facility, and the replacement of motor vehicles in certain provinces where we provide a social welfare distribution and administration service.
Interest on surplus cash during fiscal 2008 increased to $27.4 million (ZAR 199.7 million) from $16.4 million (ZAR 118.2 million) during fiscal 2007. The increase in interest on surplus cash held in South Africa was due to a higher average daily ZAR cash balance during fiscal 2008 compared with fiscal 2007 and the higher deposit rates resulting from the adjustment in the South African prime interest rate from an average of approximately 12.12% per annum during fiscal 2007, to 14.21% per annum during fiscal 2008.
During fiscal 2008, our finance costs decreased due to an increase in available cash for our pre-funding obligation which resulted in less utilization of our short-term facilities which was offset by the increase in the average rates of interest on short-term facilities. Finance costs decreased from $12.0 million (ZAR 86.5 million) during fiscal 2007 to $11.7 million (ZAR 85.3 million) during fiscal 2008.
Total tax expense for fiscal 2008 was $39.0 million (ZAR 284.5 million) compared with $37.6 million (ZAR 270.9 million) during fiscal 2007. Deferred tax assets and liabilities are measured utilizing the enacted fully distributed tax rate. Accordingly, a reduction in the fully distributed tax rate from 36.89% to 35.45% results in lower deferred tax assets and liabilities and the net effect of the change in tax rate of $5.4 million (ZAR 38.5 million) is included in our income tax expense in our audited consolidated statement of operations for fiscal 2008. If the effect of the change in our fully distributed tax rate is ignored, the increase in total tax expense was primarily due to our increased profitability in our transaction-based and hardware, software and related technology sales activities. Our effective tax rate during fiscal 2008 was 31.0%, compared to 37.1% during fiscal 2007. The change in our effective tax rate was primarily due to reduction in our fully distributed tax rate to 35.45% and fewer non-deductible expenses during fiscal 2008 compared to fiscal 2007. The adoption of FIN 48 did not have a significant impact on our effective tax rate during fiscal 2008.
In February 2008, the South African Finance Minister announced a reduction in the corporate rate of taxation for South African companies from 29% to 28%. We only recognize changes in taxation legislation applicable in South Africa in our reported results once it has been promulgated in South Africa. The change in the corporate rate of taxation for South African companies had not been promulgated as of June 30, 2008. The change in the corporate rate of taxation for South African companies was enacted on July 22, 2008, and we will reflect the change in our fully distributed rate during the first quarter of fiscal 2009.
Loss from equity-accounted investments for fiscal 2008, of $1.0 million (ZAR 7.6 million) does not include equity-accounted earnings attributable to Permit because Permit was sold in the fourth quarter of fiscal 2007. Earnings from equity-accounted investments during 2007 of $0.2 million (ZAR 1.3 million) does not include equity-accounted losses attributable to VinaPay because we had not invested in this entity as of June 30, 2007. During fiscal 2008, we recognized income from license fees, software and hardware sales made to equity-accounted investees in prior periods of approximately $0.6 million (ZAR 4.2 million). Eliminations of hardware sales and other services and income from license fees, software and hardware sales made in prior periods have been included in (loss) earnings from equity-accounted investments.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
Three Months Ended March 31, 2008 Compared to the Three Months Ended March 31, 2007
The following factors had a significant influence on our results of operations during the three months ended March 31, 2008 as compared with the same period in the prior year:
* significant weakening of the South African rand, our functional currency, against the U.S. dollar, our reporting currency, which had a negative impact on our revenues and net income in U.S. dollars;
* settlement payment received from SASSA during the third quarter of fiscal 2007 which affects the comparability of revenue and net income between the periods due to the non-recurring nature of a substantial portion of that payment;
* increased revenues from price increases, effective from July 1, 2007 from the KwaZulu-Natal provincial government for welfare distribution and administration services;
* increased number of grants paid in the North West province;
* continuation of the contract to provide the Central Bank of Ghana with a National Switch and Smart Card Payment System utilizing our UEPS technology;
* increased revenues from continued adoption of our merchant acquiring system by cardholders;
* stock-based compensation charges related to grants of restricted stock in August 2007 and February 2008 under the 2004 Amended and Restated Stock Incentive Plan; and
* change in our fully distributed tax rate from 36.89% to 35.45%, which had a positive impact on net income.
Consolidated overall results of operations
This discussion is based on the amounts which were prepared in accordance with US GAAP.
Analyzed in ZAR and ignoring the effects of the third quarter 2007 settlement payment received from SASSA of $5.9 million (ZAR 43.0 million), the increase in revenue and cost of goods sold, IT processing, servicing and support for the three months ended March 31, 2008, was primarily due to the higher volumes in our transaction-based activities, a greater number of UEPS-based smart card holders and the sale of hardware and software development and customization to the Bank of Ghana.
Our operating income margin for the three months ended March 31, 2008, decreased to 45% compared with 47% for the three months ended March 31, 2007, primarily as a result of the SASSA settlement payment.
Selling, general and administration expenses increased during the third quarter of fiscal 2008 from the comparable quarter in fiscal 2007 primarily due to the stock-based compensation charge related to the restricted stock grants awarded in the first and third quarters of fiscal 2008 and increases in goods and services purchased from third parties, including the effects of the increase in inflation in South Africa.
Our direct costs of maintaining a listing on Nasdaq as well as compliance with the Sarbanes-Oxley Act of 2002, or Sarbanes, particularly Section 404 of Sarbanes, includes independent directorsâ€™ fees, legal fees, fees paid to Nasdaq, our compliance officerâ€™s salary, fees paid to consultants who assist with Sarbanes compliance and fees paid to our independent accountants related to the audit and review process. This has resulted in expenditures of $0.4 million (ZAR 3.2 million) and $0.4 million (ZAR 2.6 million) during the three months ended March 31, 2008 and 2007, respectively.
Depreciation and amortization includes the amortization charge related to the acquisition of Prism of $1.3 million (ZAR 10.0 million) and $1.4 million (ZAR 10.0 million), respectively, for the three months ended March 31, 2008 and 2007. The deferred tax benefit included in our statement of operations related to the intangible amortization charge for the three months ended March 31, 2008 and 2007, respectively was $0.5 million (ZAR 3.6 million). Property, plant and equipment acquired to provide administration and distribution services to our customers is depreciated over the shorter of expected useful life and the contract period with the provincial government. We are currently in an extension phase with all our contracts and the majority of our property, plant and equipment related to the administration and distribution of social welfare grants has been written off. Accordingly, depreciation expense related to these activities has decreased during the three months ended March 31, 2008 compared with the three months ended March 31, 2007. This reduction in depreciation was partially offset by the increase in depreciation of our participating merchant POS terminals.
Interest on surplus cash for the three months ended March 31, 2008 increased to $6.9 million (ZAR 51.1 million) from $4.1 million (ZAR 29.6 million) for the three months ended March 31, 2007. The increase in interest on surplus cash held in South Africa was due to a higher average daily ZAR cash balance during the three months ended March 31, 2008 compared with the three months ended March 31, 2007 and higher deposit rates resulting from the adjustment in the South African prime interest rate from an average of approximately 12.50% per annum for the three months ended March 31, 2007, to 14.50% per annum for the three months ended March 31, 2008.
During the three months ended March 31, 2008, our finance costs decreased due to an increase in available cash for our pre-funding obligation which resulted in less utilization of our short-term facilities which was offset by the increase in the average rates of interest on short-term facilities. Finance costs decreased to $3.1 million (ZAR 22.9 million) for the three months ended March 31, 2008, from $3.4 million (ZAR 24.5 million) for the three months ended March 31, 2007.
Total tax expense for the three months ended March 31, 2008 was $5.2 million (ZAR 38.2 million) compared with $11.4 million (ZAR 82.2 million) during the same period in the comparable quarter of the prior fiscal year. Deferred tax assets and liabilities are measured utilizing the enacted fully distributed tax rate. Accordingly, a reduction in the fully distributed tax rate from 36.89% to 35.45% results in lower deferred tax assets and liabilities and the net change of $5.9 million (ZAR 43.9 million) is included in our income tax expense in our unaudited condensed consolidated statement of operations for the third quarter of fiscal 2008. In ZAR, if the effect of the change in our fully distributed tax rate is ignored the increase in our total tax expense was primarily due to our increased profitability in our transaction-based and hardware, software and related technology sales activities. Our effective tax rate for the three months ended March 31, 2008 was 15.9%, compared to 38.2% for the three months ended March 31, 2007. The change in our effective tax rate was primarily due to reduction in our fully distributed tax rate to 35.45% and fewer non-deductible expenses during the three months ended March 31, 2008 compared to the three months ended March 31, 2007. The adoption of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB 109 , or FIN 48, did not have a significant impact on our effective tax rate during the three months ended March 31, 2008.
Loss from equity-accounted investments for the three months ended March 31, 2008, of $0.3 million (ZAR 2.1 million) does not include equity-accounted earnings attributable to Permit Group 2 (Pty) Ltd (â€śPermitâ€ť) because Permit was sold in the fourth quarter of fiscal year 2007. Loss from equity-accounted investments for the three months ended March 31, 2007 of $0.2 million (ZAR 1.1 million) does not include equity-accounted losses attributable to VinaPay because we had not invested in this entity as of March 31, 2007. During the three months ended March 31, 2008, we recognized income from license fees, software and hardware sales made to equity-accounted investees in prior periods of approximately $0.2 million (ZAR 1.1 million). Eliminations of hardware sales and other services and income from license fees, software and hardware sales made in prior periods have been included in (loss) earnings from equity-accounted investments.
Dr. Serge Belamant
Good morning to our investors in the US and good afternoon to our investors in Europe and of course in South Africa. Thank you for joining us for our fiscal 2008 fourth quarter and full year earnings call.
As usual, Herman Kotze, our CFO is with me today. Both our press releases and 10-K are available on our website at www.net1ueps.com. During this call we will be making forward-looking statements and I call your attention to the cautionary language contained in our press release regarding the risks and uncertainties associated with forward-looking statements.
In addition, during this call we will be using certain non-GAAP financial measures as defined under SEC rules, where required by these rules we have provided a reconciliation of the non-GAAP measures to the most directly comparable GAAP measures as exhibits in the press release dated yesterday.
We will primarily discuss our results in South African rand, which is non-GAAP measure. We analyze our results of operations in our latest Form 10-K and in our press release in South African rand to assist investors in understanding the changes in underlying trends of our business.
Company results can be significantly impacted by currency fluctuations between the US dollar and the South African rand. And therefore for clarification purposes I would like to reiterate that the use of South African rand is a non-GAAP measure and the appropriate GAAP presentation is included in our Annual Report on Form 10-K and press release and we advise our investors and analysts to review the companyâ€™s results in terms of US GAAP.
During the fourth quarter of fiscal 2008 the South African rand as we all know was significantly weaker against the US dollar compared with quarter three 2008 and quarter four of 2007. As you are aware we also provide additional non-GAAP measurements, namely, fundamental net income and fundamental earnings per share that eliminate among other adjustments, the significant non-cash accounting increase required by GAAP for intangible assets amortization and stock based compensation charges.
On this basis we have shown an increase in fundamental net income of 34% from South African rand 135.9 million for the three months ended June 30, 2007 to South African rand 183.7 million for the three months ended June 30, 2008. This translates into a fundamental earnings per share increase in South African rand of 34% from 238 South African cents to 319 South African cents.
Please note that the increase we achieved in USD is 24%. On our yearly EPS, we have realized a US $1.52 according to GAAP measure which is a 36% increase on last yearâ€™s EPS or in fundamental earning measures a $1.55 US which is a 26% increase on last yearâ€™s EPS.
As far as Iâ€™m concerned, this is a testament for the performance of our company and of course of its people. At this point I would like to take the opportunity to compliment both my executive team as well as all of the personnel in Net1 for the passion, dedication and professionalism which they have demonstrated over the last year without which our company would not be able to achieve its long-term ambitions.
I will now take some time summarizing the activities we have been engaged in during the last year and highlight both the progress we have made and the difficulties we have encountered and how we have managed to circumvent these when necessary.
I will comment by discussing the position with SASSA. As we are all aware SASSA has until the end of September to make up their mind, vis-Ă -vis the award of the South African tender on the provincial by province basis. We are still of the opinion that SASSA will in the next two to three weeks finalize this decision. We have also reiterated over the last number of quarters that we also believe that whatever outcome SASSA decides upon will not, in our view, affect our current position within the South African pension and welfare business. If anything, we believe we have a better then average chance of improving our position in terms of market share and [thereâ€™s] a number of beneficiaries that we are currently servicing.
At this point we have had no further official statement from SASSA telling us what will be the final date for their final evaluation and tender award. There is still a possibility that this tender may in fact be cancelled as, as we all know, the new government namely the [ANC] government, is already changed hands and new elections will occur in South Africa during the middle next year.
This may be or prove to be one of the most difficult periods of transition which may lead to the decision, vis-Ă -vis the SASSA tender to be delayed further. I must however restate that our current position in the South African market is dominant. Any delay in the award of the tender cannot in any form affect our company or its earnings, and we firmly believe that in the short to medium or long-term, we will still remain the preferred company by government to deliver such an important service to the country as a whole.
Iâ€™d like to now talk a little bit about our wage payment system initiatives. We are all aware of the progress we have made, vis-Ă -vis been able to utilize a banking license and the breakthrough that we have made by being awarded from MasterCard the ability to [inaudible] our own UEPS application together with an EMV debit application on a MasterCard branded card. The purpose of this initiative was to ensure that any card that we would issue through Grindrod Bank to our new customer base would be able to interoperate with other and existing point-of-sale devices which are already installed within the South African territory.
Moreover this approval has been reached, MasterCardâ€™s procedures appear to be extremely slow to implement. We therefore have been trying to implement the equipment, obtain the correct certification, obtain the tech kits and all other equipment and procedures that are required for us to be able to comply to MasterCardâ€™s regulations.
This is something that appears to be taking far longer then we had anticipated. However, we have decided to continue our rollout in order not to delay our customer acquisitions. We have therefore established a number of initiatives all mutually exclusive from each other that will allow us to rollout our technology and acquire customers through the bank without the necessary interoperability that is provided or will be provided by a MasterCard branded card.
As an example, we all know that we have already launched in rural areas a number of payment initiatives to the farming community of South Africa. A number of farms have already been signed up and our payment system has proved to be extremely useful and successful in these areas. We have already tested a project in South African schools where each school pupil will have a bank account and will be issued with a UEPS card that will allow them to make all purchases from canteen facilities, from school books, from the payment of school fees, payment of sports equipment, payment of transportation, and thus remove the necessary for cash in the school environment.
This project has already been endorsed by a number of Head Masters throughout the country and we certainly intend to roll it out to a minimum of 300 schools throughout the country in a short to medium term. The fundamental reason for the elimination of cash is to remove the ever growing concern that school children utilize cash for the purchasing of drugs. If you remove the cash it is unlikely that drug pushers are going to continue to show interest where they are no longer capable of obtaining the cash for what they are selling.
Another project which again was independently was launched is one concerning micro financing. Micro lenders or people who finance small loans, at [high] interest rates always have the problem of insuring that they will be able to collect the repayment on a monthly basis for these loans. These micro lenders have agreed to provide their customers with a banking account in Grindrod therefore insuring that debit orders against these accounts can be insured.
Because of interoperability customers will have the ability to transfer any remaining amount from their Grindrod account into any traditional banking account within South Africa. This will allow them in the short-term to utilize both the UEPS card to gain access to low interest loans and on the other side to utilize a traditional account to gain access to traditional ATMs or point-of-sales which have been installed and are currently operated by other financial institutions.
In the longer term, we believe that these customers will remain with Grindrod bank for all of their services including services such as home loans, longer term loans, and overdraft facilities. Another initiative that is also being concluded is together with a financial arm of [Kosatu] which represents around 11 million people in South Africa who are members of one or more of these unions. The concept of [Kosatu] is to provide a package of affordable financial services to their members and to deliver those financial services through the UEPS card technology.
We have reached an MOU with the financial arm of [Kosatu] that the JV would be able to be set on a 50/50 basis between them and ourselves. This JV will allow us to deploy a number, such as 2,500 kiosks who are capable of accepting cash, accepting UEPS cards, and being able to conduct transactions such as top up cell phone vouchers, electricity, water, bill payments and money transfers.
These particular kiosks will be implemented in all government offices [inaudible] and other government departments thus providing an ideal position for huge traffic [of feet] that will be able to utilize the equipment for their own personal use. [Kosatu] of course will be able to issue bank accounts to employees of these organizations and government institutions in order to grow the customer base and migrate them to UEPS technology thus generating fees based on a transaction basis for them to re input into the unions.
The last initiative which I think is worth mentioning is what we have done with West Bank. West Bank is a company which today issues hundreds of thousands of cards for the purpose of performing their [inaudible] management and fleet management. West Bank has signed with Net1 to implement the UEPS technology at petrol stations throughout South Africa in order to replace the West Bank current credit card, namely a [Nexrod] card but a UEPS card which will be able to be used with biometric [inaudible]. The reason beyond the venture is for West Bank to securitize all of these transactions which today are too easily defrauded. This initiative will simply create a further footprint for Net1 in South Africa in the areas of petrol stations and stalls which are linked to petrol stations simply creating a greater infrastructure for our card holders to utilize.
And as mentioned that because of our pension and welfare system our merchants requiring infrastructure continues to grow in terms of its usability and access to many millions of our customers as will be seen in our 10-Q and 10-K this year.
Focusing a little bit on EasyPay you will see that EasyPay continues to command the greater portion of the South African transaction switching system outside of that bank. EasyPay continues to offer its services to more and more merchants and EasyPay continues to grow in providing these merchants with additional services such as cellular phone top ups, the selling of electricity and water tokens, bill payments and of course the introduction of money transfers.
We believe this is an extremely lucrative business which we are certainly prepared to share with the merchants that today are happy to implement and to utilize our UEPS merchant infrastructure. To focus now a little bit on international business, we all are aware of our successful our Ghanaian implementation has been. I am proud to say that I do not recall in my 30 years of IT history any company that has ever been able to sign and implement a national payment system in the period of six months.
And to do it absolutely successfully. I believe that Ghana is issuing a number of press releases on a daily basis where all participants in Ghana from British Airways to banks to financial institutions to large shopping centers, are all committed and committing to the implementation of the UEPS technology as the national payment system for the entire of Ghana. Officially [inaudible] has already published that Ghana towards the end of this year will be the first country in the world to have a national payment system that will also be provided on cellular phone technology where all functionality that UEPS provides on its cards will be made available on a cell phone as well.
This together with our virtual credit card concept will allow Ghana to enter the world of card not present transaction in a complete and utter secure manner, something that has not been achieved anywhere in the world to date. Moving on to Iraq, we are pleased to report that our Iraqi project the first project that we have done where a country outsources the processing to South Africa has also been implemented in a period of 90 days completely successfully as well.
A number of government institutions with their local partners and local banks have already issued, enrolled and transacted with a number of their clients and we are pleased to report that the strength of our system in terms of [ghost] workers in terms of identifying duplications, in terms of identifying errors, in payment files, is already proved incredibly successful and those already [are like it] all or at least the best part have the errors that were present in a number of files which of course could have led to losses by the Iraqi government, losses that really belonged to the people that deserved to be paid.
Because of our Ghanaian and Iraqi successful implementations a number of other countries have approached Net1 and a number of tenders have been issued and we are awaiting the finality in a number of countries such as Liberia, Angola, Mozambique, The Philippines, and others. We firmly believe that we are better then well placed to continue to deploy this unique technology which has now huge supporters as the proof that it works and can make a difference to the economy of any country is no longer a debate.
Further a field, our initiatives in Vietnam and Columbia vis-Ă -vis our VTU system have gone excessively well. The growth is growing at the rate that we had predicted and we are now in the position to introduce UEPS on those platforms in order to allow these local businesses to explode as a total technology rather then purely as a virtual top up system.
Lastly our virtual credit card initiative that has been commenced just about 12 months ago we believe is now ready for its first pilot which we hope to announce shortly and this pilot will take place in a first world country. This will achieve of course the proof that UEPS can actually be used in both third world as well as first world economies and that VCC will be the link between first and third world economies.
Of course I would like to spend a little more time discussing our latest acquisition namely that of BGS, and why this acquisition will be of great benefit to our companies in the short to medium term. The first point that needs to be understood is that BGSâ€™s technology called [duet] is in fact the forerunner of the UEPS. Duet is based on our card to card funds transfer [inaudible] system. Duet was created in 1993-1994 and grew mainly in the CIS republics including Russia.
We are excited about BGS forming part of Net1 understanding that the largest customer of BGS today is a bank in Russia named [Stayabank] Savings Bank. [Stayabank] have a number of customers they have and the infrastructure they have in Russia probably would be if not the largest certainly in the top two or three of the largest banks in the world.
By adding a partner that will still own 19.9% of BGS, we believe that we have their commitment to continue to deploy duet/UEPS technology in Russia understanding that the UEPS will give [Stayabank] further functionality, functionality that is not available on the earlier version of UEPS namely duet. We believe that by utilizing the infrastructures that have been deployed that accept duet such as 90,000 point-of-sale devices, 15,000 ATMs, and millions of cards will allow us to provide financial services and other services in these countries as per our wave to initiatives that we normally commence once our technology has become widely accepted.
BGS also offers us the same type of opportunity in other CIS republics where the duet technology has become pretty much the de facto standard. We firmly believe that in this country the opportunities are even greater as we are able to create joint ventures with local partners that would ensure that we can convert a model which is based on hardware and software sales to one that is based on transaction and recurring revenues. BGS outside of the CIS has also made some headway in countries in which we are already playing such as Indonesia, and Vietnam and in those countries we will obviously consolidate our efforts to ensure that we can deploy faster and better for the benefit of the company.
BGS is also entered the world of India with a contractual agreement with a company called Vina. We have in the passed discussed the potential of an opportunity with Vina and decided to decline it. With the BGS initiative and the BGS people in India we will be able to review our own ideas of what can possibly be done on this huge country where 1.3 or 1.4 billion people live. We are still of the view that we will be treading in India very carefully as we know that it is easy to sign and MOU. It is easy to sign a contract, but it appears to be far more difficult to make any money.
We are a company that is always focused on the bottom line and not simply on making announcements for the sake of it or to simply increase the top line without guarding and preserving our margins. BGS also offers us some extremely capable financial business development and technology employees some of which will actually form part of our executive committee and we intend to utilize them to focus on setting UEPS in new territories, migrating a number of duet territories, into the UEPS concept and format and obviously to spearhead our phase two which is to start making transactions and generating profits out of financial services such as [inaudible], electricity, money transfers, and bill payments.
Of course they will also focus on introducing our VCC concept to the largest cellular phone operators in Russia such as NTS, and a number of others. We firmly believe that our BGS acquisition be strategically important for Net1 as in some instance it doubles up the number of countries in which we now operate and doubles up the number of cards that we have issued. As the two technologies fundamentally are the same, it will become simpler and easier to integrate them by taking the best of both and creating a product UEPS product, that will be easier to sell in many other countries in the world.
In conclusion and before I hand over to Herman, I would like to state that once again I am delighted with the result that we have created during this year. I also understand that we are given some guidance for next year, guidance that some analysts have told us was a little low, namely 15% that want us to understand that the acquisition of BGS and its implication, the evaluation and conclusion of the SASSA tender, as well as a number of other financial decisions will in fact affect this 15%.
We believe that weâ€™ve always been reasonably conservative in our approach and what we like to tell our investors. We believe at the end of the day that 15% will certainly be on the low side and that obviously the company has within itself the power to generate far greater increases during the next year. Iâ€™d like to conclude by handing over to Herman and to wish you all a wonderful weekend.
Thank you, Serge, and greetings to our investors around the world. I will discuss the key trends of the fourth quarter of fiscal 2008 compared to the fourth quarter of fiscal 2007 along with the key trends between the fourth and the third quarters of fiscal 2008.
I will also discuss certain financial aspects of our acquisition of BGS and the proposed secondary listing on the Johannesburg Stock Exchange in South Africa. We have also updated the Frequently Asked Questions section in our press release to provide further clarity on the questions we are asked most often by our investors and the analysts.
Again, for clarification purposes, I would like to mention that my following discussion will be based on our results in South African rand as this provides the best indicator of the groupâ€™s actual operational performance and this is a non-GAAP measure. In order to review our results in terms of US dollars and GAAP, please review our Annual filing on Form 10-K as well as our earnings press release filed yesterday evening.
For Q4 2008 our average rand dollar exchange rate was significantly weaker at 7 rand 80 to the dollar compared to 7 rand 12 to the dollar for Q4 of fiscal 2007 and sequentially from Q3 we also saw a significant weakening for the 7 rand 41 to the dollar level. Looking at the current situation, the rand has remained relatively steady against the US dollar and is currently trading at around 7 rand 75 to the dollar. Any fluctuation of the rand obviously influences the dollar equivalent result of our South African operations which is why we provide you with constant currency information in our press release and on this call as the core operational drivers are clearly visible from these numbers.
I am impressed with our fourth quarter results as we have again achieved great quarter earnings and we have met or exceeded my key financial indicators of continued fundamental earnings growth, strong operating margins, and of course excellent cash conversion. Revenue for our current quarter was 485.4 million rand, up 13% year-over-year. Our gross margin was 74% compared to 75% the same quarter last year and 74% or the same compared to our preceding quarter.
However in our business gross margin is not the best indicator of the groupâ€™s profitability due to our [various] product offering. We focus on operating income which increased by 22% for Q4 2008 compared to Q4 2007 and had increased by 1% sequentially from Q3 2008. The overall operating margin for Q4 2008 compared to last yearâ€™s Q4 improved to 44% from 41%. Sequentially the operating margin decreased slightly from the 45% in Q3 mainly as a result of the inclusion of more high margin software development revenue for the Ghana contract in Q3 partially offset by improved margins from our transaction based activities due to improved trading conditions.
Letâ€™s now analyze the business in more detail using our reported segments, our transaction based activity segment increased its revenues year-over-year by 15% and sequentially by 7%. Our operating income increased by 32% compared to the previous year. Sequentially our operating margin improved to 58% from 55% in Q3 this year compared to the 50% of Q4 last year mainly as a result of the following three factors.
One, price increases received in our social grant payment business in the KwaZulu-Natal and Northern Cape provinces as well as higher volumes in KwaZulu-Natal and the Northwest specifically. Two, increased volume of pensioner spending at merchants in Q4 of 2008, and three increased transaction volumes through the EasyPay switch.
We continued to show strong and robust growth from this business through the combination of price increases, [granting] the number of beneficiaries and the continued migration of beneficiaries to our merchant acquiring network. The total number of payments processed to beneficiaries increased from 11.43 million for Q4 of 2007 to 11.97 million for Q4 of 2008 which is an increase of 5%.
The increase is mainly due to the transfer of beneficiaries from the Post Office to ourselves in the Northwest province during fiscal 2008 which resulted in an increase of approximately 250,000 beneficiaries paid by us in this province.
Contrary to the [trading] of other provinces, the number of beneficiaries in the Eastern Cape declined slightly due to the intensive anti fraud campaign launched by government that resulted in the removal of fraudulent beneficiary.
During the last week the Department of Social Welfare in South Africa announced the implementation of new regulations allowing higher wage earners to apply for different social grants. The most significant aspect is the increase in the income threshold required to qualify for child support grants. In the past urban dwellers only qualified for child support grants if they earned 800 rand or less while in rural areas it was 1,100 rand or less. This threshold has now been increased to include people earning less then 2,200 rand per month in all areas.
According to a statement by the Social Development Minister over a million people who were excluded before will now be in a position to apply for a social grant. Using a rule of thumb, this implies that at least 400,000 of these potential new grant recipients will be in our current provinces. These qualifiers would have to apply for the grants and go through the approval process which takes some time and we donâ€™t expect to see an increase in numbers due to these new regulations until Q3 or Q4 of fiscal 2009.
During Q4 of 2008 our merchant acquiring system continued its impressive performance as we processed a total of 2.2 billion rand in transactions through our merchant acquiring network which is an increase of 24% compared to 1.78 billion rand during Q4 2007 and a sequential increase of 8% compared to the 1.63 billion rand during Q3 of 2008 or on a completed pay cycle basis.
The productivity of our installed terminal base of 4,394 terminals increased to 956 transactions processed through a terminal during the fourth quarter of 2008 pay cycles compared to 810 transactions processed during Q4 of 2007 and 953 processed during the preceding quarter. This increased through put from the comparable period in fiscal 2007 demonstrates the continued rapid acceptance rate of our cardholders as they become familiar with and accustomed to the convenience associated with our merchant acquiring initiative as they can receive and spend their grants at any time of the month.
During Q4 of 2008 EasyPay processed 133.4 million transactions with an approximate value of 51 billion rand compared with 114.2 million transactions processed with an approximate value of 25.1 billion rand during Q4 of 2007 and 129.2 million transactions processed with an approximate value of 28 billion rand during Q3 or the previous quarter of 2008.
The average fee per transaction during Q4 of 2008 was approximately 22 South African cents as opposed to the 20 cents for both Q2 and Q3 of 2008. This increase is the result of the change in product mix during the quarter. We expect the average fee per transaction to remain between 20 to 22 cents during the first quarter of 2009. EasyPayâ€™s operating margins are steadily improving as the efficiencies of our new operating platforms and expense management systems become apparent.
The EasyPay operating margin for Q4 improved to 44% from 34.1% in Q3 mainly due to higher volumes of value-added services processed during the last quarter. Our Smart Card account segment had revenues of 65.9 million rand for Q4 of 2008 which is an increase of 4% year-over-year. The total number of active Smart Card accounts increased by 4% from 3.8 million during Q4 of 2007 to 4 million during Q3 of 2008, sequentially there was a 2% increase in the number of active Smart Card accounts.
Our financial services business had revenues of 15 million rand for Q4 of 2008 which is a decrease of 26% compared to Q4 of 2007 and a sequential increase of 1% compared to Q3 of 2008. Revenues from our traditional micro lending business decreased during the quarter due to increased competition, our strategic decision not to growth this business and overall lower return on traditional micro lending loans as a result of compliance with The National Credit Act. Revenues from UEPS based lending decreased during Q4 of 2008 compared with Q4 of 2007 primarily due to the lower number of loans granted.
In addition on average the return on these UEPS based loans was lower during Q4 2008 compared with Q4 2007. The final operating segment is our hardware, software and related technology sale segment. This segment traditionally includes revenues that occur on an irregular or [once-off] basis and it can be difficult to predict sales from year to year. This segment includes the sales of UEPS rated hardware and software as well as the sales of subscriber identity modules or SIM cards, cryptography services, and SIM card licenses.
This segment had revenues of 107.7 rand for Q4 of 2007 which is an increase of 16% year-over-year mainly as the result of the delivery of hardware and customization and development activities performed during the quarter related to the tender to provide Ghana with a national switch and Smart Card system from which we generated revenues of approximately $3.4 million during Q4. To date we have recognized revenues amounting to $14.2 million relating to the Ghana contract.
The operating margin of this segment decreased from 27% for Q4 of 2007 to 15% in Q4 2008 mainly as a result of significant high margin sells to Nedbank in Q4 2007 as well as the impact of the specific services rendered to Ghana during the last quarter. In February 2008, the South African Finance Minister announced a reduction in the corporate rate of taxation for South African companies from 29% to 28%. We only recognize changes in taxation legislation applicable in South Africa in our reported results once it has been promulgated in South Africa.
The change in the corporate rate of taxation for South African countries had not been promulgated as of June 30, 2008 at our year end, the change in the corporate rate of taxation for South African companies was enacted on the 22 of July, 2008 and we will reflect the change in our fully distributed rates during the first quarter of fiscal 2009. Our fully distributed tax rate will therefore decrease from 35.45% to 34.55%.
I am very happy with the progress made by our equity account investments in Namibia, Botswana, Columbia, and Vietnam. The fledgling businesses continue to grow and have exciting prospects in terms of business development as Serge had indicated before. On a GAAP basis our quarterly net income of 167.6 million rand represents an increase of 54% year-over-year and GAAP earnings per share increased by 34% on a constant currency basis while fundamental earnings per share for Q4 2008 increased by 34% compared to Q4 2007 and also increased by 8% compared to the previous quarter.
The GAAP net income for Q3 was significantly higher then in Q4 due to the adjustment of our effective tax rate in Q3 caused by the reduction from 12% to 10% in the [SCC] rate in South Africa. Before turning to our balance sheet I would again like to mention that our cash provided for operating activities can and does fluctuate significantly as a result of the planning of the commencement of our monthly welfare payment activities specifically through merchants. As a general rule however, we expect 100% or more cash conversion ratio over any complete pay cycle period. As of June 30, 2008 we had $272.5 million of cash and cash equivalents. The business remains very cash generative and I remain comfortable that we have sufficient liquidity between our cash and cash equivalents in our current credit facilities to fund our working capital requirements for the next four quarters.
As Iâ€™ve stated before I view the balance sheet item called pre-funded social welfare grants receivables as a highly liquid very short-term receivable best described as a near-term equivalent. We had $35.4 million of pre-funding outstanding at the end of June. The decrease in our accounts receivable compared with June 30, 2007 is largely due to all provincial governments paying us the amounts outstanding before June 30, 2008.
Our other payables include amounts due to merchants. The increase is primarily due to merchants receiving settlement of the grants distributed on the last day of Q4 2008 in the first two days of Q1 2009. Our default income tax liabilities have decreased significantly mainly as a result of the reduction in our fully distributed tax rate during Q3 of 2008. As discussed in question 15 of the Frequently Asked Question section of our earnings press release we believe it most appropriate at this point in time to retain our cash reserves to finance the expansion of the business, to reduce the significant cost of our current and possible future prefunding of welfare grant obligations, and to execute relevant acquisition opportunities such as the BGS acquisition announced yesterday with which I would like to do now.
The financial information I am about to provide for BGS is based on Austrian GAAP and measured in Euros and is therefore classified as a non-GAAP measurement. We acquired BGS for a total cash consideration of approximately 71.5 million Euros and by issuing 40,154 Net1 shares, locked up for a period of one year to the management shareholders of BGS. Our cash offer was based on an earnings multiple of 15 for BGSâ€™s most recent fiscal year that ended on December 31, 2007 implying a profit after-tax number for that year of 5.75 million Euros.
During the same fiscal year the revenue of BGS was 17.2 million Euros and the operating margin was 39%. I must emphasize that a significant portion of BGSâ€™s activities are similar to those of our hardware and software and related technology sale segment and that the margins are significantly influenced by product mix and customer requirements. We are in the process of performing the required US GAAP conversion as well as the allocation of the purchase price and we intend to file a Form 8-KA with illustrative financial effects around mid-November, 2008.
We expect that a significant portion of the purchase price will be allocated to intangible assets. The cash acquisition price was financed by a six month bank loan as we have South African exchange control restrictions on our ability to use our rand cash reserves for non-South African acquisitions. However we are in the process of filing an application for a secondary listing of Net1 also known as an inward listing on the Johannesburg Stock Exchange in South Africa, call the JAC Securities Exchange.
Our primary listing will remain on the NASDAQ and we will not raise any additional capital as a result of this inward listing. Should we be successful with our application we will be able to simplify our capital structure by converting all the current special convertible preferred shares of which we have approximately 4.9 million to common stock. These shares are already included in our earnings per share calculations and the conversion will therefore not result in any EPS dilution.
We have also received permission from the South African regulators to repay the loan accounts due to our South African subsidiary to the US holding company and to redeem the B Clause preferred stock held by the US holding company in its South African subsidiary. These repayments should result in the flow of approximately $108 million at current exchange rates from our South African business to our US holding company. We will be able to affect these repayments as soon as the secondary listing process is completed which we anticipate to be during October of 2008.
We intend to settle the bank loan we are paying for the BGS acquisition with the proceeds as there is no penalty for the early settlement of the loan.
In conclusion fiscal 2008 was another exceptionally busy year and we are thrilled with the overall results and the quality of earnings. Given the amount of corporate activities, the timing of the SASSA tender outcome, and our various international business initiatives it is very difficult to provide concise earnings guidance for fiscal 2009 as Serge indicated before.
Based on the assumption that our current business activities and initiatives will continue as usual we expect to grow our fundamental earnings per share by at least 15% on a constant currency basis for fiscal 2009.