Net 1 UEPS Technologies, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2014, three months ended September 30, 2013; comparative period is the three months ended September 30, 2012. The financial statements are unaudited and presented under U.S. GAAP. The filing identifies the registrant as Net 1 UEPS Technologies, Inc.; it does not identify the company as Lesaka Technologies Inc.
Financial performance
Amounts below are U.S. dollars unless stated otherwise; financial statement amounts are in thousands.
| Metric | Q1 FY2014 | Q1 FY2013 | Change |
|---|---|---|---|
| Revenue | $123.5 million | $111.7 million | +11% |
| Operating income | $16.4 million | $9.3 million | +76% |
| Operating margin | 13% | 8% | Improved |
| Net income attributable to Net1 | $11.6 million | $6.7 million | +72% |
| Basic and diluted EPS | $0.25 | $0.15 | Increased |
| Cash from operating activities | $(1.7) million | $25.7 million | Decreased |
| Capital expenditures | $5.6 million | $6.5 million | Decreased |
- Gross costs of goods sold, IT processing, servicing and support rose 25% to $56.6 million, while selling, general and administrative expense fell 14% to $40.5 million. Depreciation and amortization was approximately $10.0 million.
- Income tax expense was $6.5 million, with a 36% effective tax rate in both periods. Management attributed the rate above South Africa’s statutory rate to non-deductible items, including Korean debt interest and stock compensation.
- Revenue growth reflected increased transaction activity, prepaid airtime, hardware sales and KSNET contribution. In reported U.S. dollars, the stronger dollar against the rand reduced reported growth; revenue rose 34% in rand terms.
- Cash and cash equivalents were $47.7 million at September 30, down from $53.7 million at June 30. Current borrowings were $15.0 million and long-term borrowings $70.4 million, or $85.4 million total. Total liabilities were $873.0 million and equity was $359.8 million.
- Settlement assets and settlement obligations were both $685.3 million at quarter end. These balances represent funds held for grant beneficiaries, health-care providers and payroll payees, and can vary with payment timing.
Material changes and operating developments
- Operating income improved partly because SASSA contract implementation costs—approximately $15.8 million in the prior-year quarter—were largely eliminated after implementation was completed in fiscal 2013.
- South African transaction-based activities generated $63.0 million revenue and $13.3 million operating income. The segment’s operating margin rose to 21% from 10%, primarily reflecting lower implementation costs.
- International transaction-based activities generated $36.8 million revenue and $2.1 million operating income, compared with an operating loss in the prior-year quarter. KSNET growth helped, while the expired Iraqi customer contract and ongoing losses at XeoHealth and Net1 Virtual Card weighed on results.
- Financial services revenue increased to $2.4 million, but operating income fell to $56,000 from $1.1 million. The national UEPS-loan rollout increased start-up costs and staffing, and corporate overhead was reallocated to the segment.
- Net1 reported more than one million registered users for its new Umoya Manje prepaid airtime product in its second month, with more than 250,000 transactions per day during peak periods. The product contributed revenue but has lower margins than other South African businesses.
- About 9.4 million smart-card accounts were active at September 30, 2013, compared with about 5.8 million a year earlier. Ad hoc terminal and card orders supported hardware sales; management cautioned that this segment’s results can fluctuate by quarter.
Liquidity, debt, outlook and risks
- Operating cash flow turned negative, chiefly reflecting expansion of the UEPS lending book and pre-funding for the October 2013 payment cycle. The company reported $46.2 million of investing cash inflow and $51.8 million of financing cash outflow, largely corresponding to movements in settlement assets and obligations.
- Management said cash and credit facilities were sufficient to fund operations for at least the next four quarters. The South African ZAR 250 million short-term facility had approximately ZAR 130 million used to support bank-issued guarantees.
- After quarter end, the company refinanced its Korean debt: a new five-year secured facilities agreement was signed October 28, and drawn amounts were used on October 29 to repay the prior KRW 92.4 billion facility. The new facilities include term loans and a revolving facility, carry floating rates based on the Korean CD rate plus margins, and include covenants applicable to Net1 Korea.
- Management expected suspended grants to continue to have a modest adverse effect on South African volumes and revenue for the rest of fiscal 2014, partly offset by newly approved grant recipients. Approximately 292,000 former cardholders had not enrolled and had their grants suspended as of September 30.
- The South African Constitutional Court heard AllPay’s appeal concerning the SASSA tender on September 10 and reserved judgment. The company said it could not predict the timing or outcome.
- The company incurred $2.1 million of DOJ- and SEC-investigation-related expenses during the quarter. The filing provides no clear estimate of any eventual resolution or financial impact.
- On November 6, the company signed a non-binding letter of intent for a BEE transaction involving 4.4 million shares at ZAR 88.50 each. A subsidiary would lend the purchase funds to the investor entity, with the shares as collateral. Completion depends on definitive agreements and regulatory approvals; the company cautioned that failure to complete could adversely affect its business.
- Other risks include foreign-exchange translation exposure, unsecured UEPS microlending credit risk, and the potential that reinsurers cannot meet obligations. Smart Life was unable to issue new insurance policies following suspension of its license. The company reported no material change to other previously disclosed risk factors.
Important facts for investors to verify
- Outcome and potential consequences of the pending AllPay appeal regarding the SASSA contract.
- Actual enrollment, grant reinstatement and payment volumes, and whether the expected fiscal 2014 revenue impact is partly offset by new recipients.
- Cash conversion as the lending portfolio expands, including loan receivable growth and credit-loss allowances.
- Terms, drawdown, repayment profile and covenant headroom under the Korean refinancing, and the remaining availability of the South African guarantee facility.
- Whether the BEE transaction receives approvals and closes, including the subsidiary loan’s repayment and collateral risks and the share issuance’s dilution.
- Developments in DOJ and SEC investigations, related expenses and any resulting contingencies.