Net 1 UEPS Technologies, Inc. — Form 10-Q summary
Reporting period: Fiscal second quarter and six months ended December 31, 2013; comparative periods ended December 31, 2012. The filing identifies the registrant as Net 1 UEPS Technologies, Inc. Financial amounts below are U.S. dollars in millions unless stated otherwise; statements are unaudited.
Financial performance and position
| Metric | Three months ended Dec. 31, 2013 | Prior year | Six months ended Dec. 31, 2013 | Prior year |
|---|---|---|---|---|
| Revenue | $137.3 | $111.4 | $260.8 | $223.1 |
| Operating income | $18.8 | $5.0 | $35.2 | $14.3 |
| Operating margin | 13.7% | 4.5% | 13.5% | 6.4% |
| Net income attributable to Net1 | $12.7 | $2.6 | $24.3 | $9.4 |
| Basic and diluted EPS | $0.28 | $0.06 | $0.53 | $0.21 |
| Operating cash flow | $(27.2) | $(6.9) | $(28.9) | $18.8 |
- Revenue grew 23% for the quarter and 17% for the half in reported dollars. Management attributed growth mainly to KSNET, higher transaction activity, prepaid airtime, lending, and ad hoc terminal and card sales. The stronger U.S. dollar reduced reported results; management reported rand revenue growth of 43% for the quarter and 39% for the half.
- Operating margin improved substantially, chiefly because SASSA contract implementation costs recorded in the prior year had largely ended. Cost of goods sold and support costs rose 44% in the quarter and 35% for the half; SG&A fell 16% and 15%, respectively.
- Quarterly operating cash use increased, and six-month operating cash flow turned negative. Management cited expansion of UEPS-based lending, working-capital movements and pre-funding for the January 2014 payment cycle. Investing cash flow was positive $246.0 million for the half, largely reflecting a $256.5 million decrease in settlement assets, matched by settlement-obligation movements in financing cash flow. Capital expenditures were $12.5 million for the half.
- Cash and cash equivalents were $22.4 million at December 31, down from $53.7 million at June 30, 2013. The balance sheet showed $42.8 million of finance loans receivable, net, versus $8.4 million at June; a new $1.8 million allowance was recorded.
- Borrowings included $57.5 million of long-term debt, $14.1 million current long-term borrowings and a $24.3 million bank overdraft. The company refinanced Korean debt with five-year secured facilities; outstanding long-term debt was approximately $67.3 million in the MD&A. South African overdraft utilization was $24.3 million.
- Current assets and liabilities include matching settlement assets and obligations of $466.6 million, which fluctuate with payment timing and are not ordinary operating liquidity. Excluding settlement balances, current assets were $216.8 million and current liabilities $89.9 million.
Material changes and management commentary
- Growth in mobile services included Umoya Manje prepaid airtime, with more than 2.4 million registered users and over one million daily transactions during peak periods. Prepaid electricity service launched in December 2013. Financial services continued a national rollout; increased loan volume came with rollout expenses and credit-loss provisioning.
- Active SASSA smart-card accounts increased to approximately 9.6 million from 6.2 million a year earlier. However, the South African Constitutional Court ruled the SASSA tender process constitutionally invalid on November 29, 2013, while suspending invalidation pending a remedy. The contract remained in force at filing; a further hearing was scheduled for February 11, 2014.
- Management said cash and available credit facilities were sufficient to fund operations for at least the next four quarters. No quantified earnings or revenue guidance was provided. The company expected third-quarter capital spending to include Korean payment terminals.
- Two BEE agreements contemplated selling 4.4 million shares at ZAR 60 per share, with the buyers’ purchase price financed by company-subsidiary loans. Conditions, including regulatory approvals, remained unmet at January 31, 2014; the deadline was extended to March 15, 2014.
- Quarterly U.S. government investigation-related expenses were $1.6 million, compared with $0.5 million a year earlier; first-half expenses were $3.8 million versus $0.5 million. The filing does not provide a clear estimate of any resulting exposure.
Risks, contingencies and unusual items
- SASSA contract: The company derives a substantial portion of revenue from the contract. An adverse remedy could affect the contract and the value of related capital investments; the outcome and timing were uncertain.
- Legal matters: A purported U.S. shareholder class action filed in December 2013 alleges misleading statements about business and compliance policies and seeks unspecified damages. The company disputes the claim and intends to defend it. Management considered other ordinary-course claims immaterial.
- Guarantees: Nedbank guarantees to third parties totaled ZAR 132.0 million ($12.6 million). The company had provided counter-guarantees; no related obligation was recognized, and the amount reduced available facility capacity.
- Operating and financial risks: Currency translation exposure is material because most revenue and expenses are rand-denominated while reporting is in U.S. dollars. Other disclosed risks include Korean competition, ongoing losses at XeoHealth and Net1 Virtual Card, credit risk in unsecured lending, and the suspended Smart Life insurance license. The filing states no foreign-exchange contracts were outstanding at December 31.
- The Finbond investment was valued using significant unobservable inputs and was reported at $7.7 million. Management reported no impairment charges in the periods presented.
Important facts for investors to verify
- Developments and remedies in the SASSA tender litigation, including continued contract status and any implications for service obligations or investment recovery.
- Whether the BEE transactions closed, and the terms, repayment capacity and risks of the loans financing the share purchases.
- Collections, delinquency and allowance adequacy as UEPS-based lending expanded, alongside the effect of lending growth on operating cash flow.
- Cash availability after settlement-related movements, overdraft usage, guarantee commitments and Korean debt maturities and covenants.
- Progress and potential costs or outcomes of the U.S. government investigations and shareholder litigation, and the effects of rand and won exchange-rate movements.