Filing identity and reporting period
The supplied filing is a Form 10-Q for Net 1 UEPS Technologies, Inc., for the quarter ended March 31, 2012 (fiscal third quarter 2012), filed May 9, 2012. This does not match the request metadata identifying Lesaka Technologies Inc. and 2011 Q3; verify the issuer and period before relying on this summary. Financial amounts below are in U.S. dollars unless stated otherwise; statement figures are in thousands.
Financial performance
| Metric | Three months ended March 31, 2012 | Three months ended March 31, 2011 | Nine months ended March 31, 2012 | Nine months ended March 31, 2011 |
|---|---|---|---|---|
| Revenue | $90.7 million | $92.8 million | $282.6 million | $246.1 million |
| Operating income (loss) | $12.5 million | $(22.1) million | $63.6 million | $10.8 million |
| Net income (loss) attributable to Net1 | $7.8 million | $(21.6) million | $52.6 million | $(4.2) million |
| Basic and diluted EPS | $0.17 | $(0.47) | $1.17 | $(0.09) |
| Operating cash flow | $22.0 million | $28.3 million | $43.0 million | $53.5 million |
- Quarterly revenue declined 2% in U.S. dollars, but increased 10% in South African rand (ZAR); the company said a stronger U.S. dollar adversely affected reported results. Nine-month revenue rose 15% in dollars and 27% in ZAR.
- Quarterly operating margin was about 13.8%, compared with a reported operating loss in the prior-year quarter that included a $41.8 million intangible-asset impairment. Excluding that impairment, management reported prior-year quarterly operating margin of 21%; the current quarter was weighed down by SASSA implementation spending and $5.4 million of related bonuses.
- Nine-month operating margin was about 22.5%. Nine-month net income included an $18.3 million deferred tax benefit from a South African tax-law change, partly offset by an $8.2 million valuation allowance on foreign tax credits, and a $4.0 million non-cash gain on liquidation of SmartSwitch Nigeria.
- Quarterly cost of goods sold, processing and support rose 11%, and selling, general and administration rose 12%. For nine months, those expenses increased 30% and 1%, respectively; depreciation and amortization rose 8%.
Balance sheet, debt and liquidity
- At March 31, 2012, cash and cash equivalents were $88.3 million, compared with $95.3 million at June 30, 2011. Total assets were $630.3 million and total equity was $353.6 million.
- Long-term borrowings were $88.6 million, with a further $14.3 million current portion; management separately describes Korean debt of approximately $102.9 million. The Korean loan carried a 7.64% rate at quarter-end, with scheduled principal payments of about $7.2 million in April and October 2012 and final maturity in October 2015.
- A South African ZAR 250 million (about $32.5 million) short-term credit facility was undrawn. Management said cash and facilities were sufficient for operations, including SASSA implementation, for at least the next four quarters.
- Working capital includes settlement assets and obligations that match at $39.4 million at March 31; these balances fluctuate with timing of grant, health-care and payroll receipts and disbursements.
- Capital expenditures were $23.5 million for the nine months, versus $9.5 million a year earlier. The company reported no off-balance-sheet arrangements.
Material changes and business developments
- SASSA contract: The company won a five-year national South African social-grant payment contract covering all nine provinces. The prior five-province contract ended March 31, 2012; national payments for approximately 9.2 million beneficiaries began April 2, 2012. The contract pays ZAR 16.44 per beneficiary paid, or ZAR 14.42 net of VAT.
- Implementation was planned in two phases: issuing approximately 2.5 million cards to beneficiaries not previously served, followed by nationwide re-enrollment and new card issuance. The second phase was expected to start in June 2012 and be substantially complete by March 2013. The company expected $45–$50 million in cumulative ramp-related capital spending, roughly two-thirds by the end of fiscal Q1 2013.
- The quarter included about $1.3 million in direct implementation costs and approximately $7.0 million in capital expenditures primarily for payment vehicles. The company had hired about 2,200 of an estimated 2,600 temporary workers for the first phase; it expected its permanent workforce to grow by about 900 after the second phase.
- International transaction-based revenue rose strongly, largely reflecting the KSNET acquisition and other business growth; hardware, software and related technology sales fell. The Eason prepaid airtime/electricity business, acquired in October 2011 for approximately $4.5 million, contributed $10.1 million revenue and a $0.4 million net loss since acquisition.
- Management reported that the South African rand weakened against the U.S. dollar, reducing translated results. It also cited lower-margin prepaid airtime sales, additional acquisition-related amortization, and start-up spending in financial services and international initiatives.
Outlook, risks and unusual items
- Management expects SASSA-related operating costs and capital investment to remain elevated during implementation, with margins potentially lower in the near term and possibly longer term. It warned that delays or unexpected costs could harm operating results and cash flow.
- The new SASSA award is being challenged. AllPay sought to set aside the award, with a hearing scheduled to begin May 29, 2012; the company said the outcome and timing could not be predicted. Empilweni’s urgent bid to block implementation was struck from the court roll as not urgent; no further action was reported at filing.
- The expanded contract increases dependence on SASSA, expected again to represent a majority of revenue. The company also faces counterparty risk because grant funds must be deposited with South African financial institutions before payment cycles. The public disclosure of its tender submission could expose competitively sensitive information.
- KSNET’s competitive Korean market was expected to pressure operating margins in the short to medium term. Management expected its expansion into small and medium merchants and additional services might improve margins over time. XeoHealth anticipated beginning Missouri Medicaid recovery-audit services by September 2012; the Banamex VCPay launch was targeted for fiscal Q2 2013.
- On April 19, 2012, the company issued a BEE consortium an option to purchase 8,955,000 shares. Its $11.7 million grant-date fair value was expected to be expensed in full in the quarter ended June 30, 2012; potential dilution and the transaction’s effect on BEE status warrant review.
- Key exposures include foreign-exchange translation, interest-rate movements on Korean debt, credit and liquidity risk, and insurance reinsurance recoverability. The company stated that reinsurer failure could leave it responsible for policy liabilities.
Most important facts for investors to verify
- Confirm the filing issuer and reporting period: the source is Net 1 UEPS Technologies, Inc., quarter ended March 31, 2012—not Lesaka Technologies Inc., 2011 Q3.
- Review the SASSA contract’s enforceability, litigation status, actual implementation costs, capital spending and per-beneficiary economics as enrollment progresses.
- Separate recurring earnings from the $18.3 million deferred-tax benefit, $8.2 million foreign-tax-credit allowance, $4.0 million liquidation gain and prior-year $41.8 million impairment.
- Track operating cash conversion, receivables, cash balances and scheduled Korean debt payments alongside the planned SASSA investment program.
- Assess potential dilution and expense from the BEE option, foreign-currency sensitivity, and the results and funding needs of KSNET, XeoHealth and other growth initiatives.