Business context and reporting period
This Form 10-Q is for Net 1 UEPS Technologies, Inc. (Net1), for the quarter ended September 30, 2011, the first quarter of fiscal 2012. The filing covers payment processing and social-grant distribution, smart-card accounts, financial services, and technology sales. The request metadata names Lesaka Technologies Inc.; the supplied filing identifies the registrant as Net1.
Comparisons below are with the three months ended September 30, 2010. Financial statement amounts are in U.S. dollars; amounts are rounded to millions unless noted.
Financial performance and position
| Metric | Q1 FY2012 | Q1 FY2011 | Change |
|---|---|---|---|
| Revenue | $99.9m | $64.3m | +55% |
| Operating income | $30.8m | $11.0m | +181% |
| Operating margin | 31% | 17% | +14 percentage points |
| Net income attributable to Net1 | $19.8m | $7.4m | +166% |
| Basic and diluted EPS | $0.44 | $0.16 | Up |
| Operating cash flow | $27.2m | $30.2m | Down $2.9m |
| Capital expenditures | $4.5m | $0.8m | Up |
Cost of goods sold, processing and support rose 82% to $32.9m, while selling, general and administrative expense fell 11% to $27.1m. Depreciation and amortization rose 85% to $9.1m, primarily reflecting acquired KSNET intangible assets. Interest income decreased to $2.0m from $3.1m; interest expense increased to $2.6m from $0.2m, mainly because of debt used to finance KSNET. Income tax expense was $10.6m and the effective tax rate was 34.9%, versus 44.9%.
At September 30, cash and cash equivalents were $102.0m, compared with $95.3m at June 30, 2011. Total assets were $736.7m and total liabilities were $428.9m. Long-term borrowings were $97.0m, with $13.8m classified as current. The $31.6m South African short-term credit facility was undrawn. Management said cash and available facilities were sufficient for at least the next four quarters.
Net cash increased $6.7m during the quarter to $102.0m, including $27.2m provided by operations, $2.6m used in investing activities and $4.6m used in financing activities; exchange-rate changes reduced cash by $13.4m. Operating cash flow was lower year over year mainly because of reduced interest income, increased interest expense and higher tax payments. The Korean senior secured loan was approximately $110.8m at September 30, bore 7.69% interest, and had semiannual principal payments of approximately $6.9m beginning October 2011. Contractual obligations totaled $143.5m, including debt and interest.
Material changes versus the prior comparable period
- KSNET, acquired in October 2010, contributed substantially to the revenue increase and drove higher costs, amortization and borrowing expense. International transaction-based revenue was $30.3m versus $0.5m; that segment reported $0.7m of operating income versus a $0.7m loss, after $3.3m of intangible amortization.
- South African transaction-based revenue increased 11% to $49.9m, with operating income up 14% to $20.2m. Smart-card accounts revenue was $8.3m, up 4%; financial-services revenue rose 69% to $2.1m; hardware, software and technology revenue decreased 3% to $9.4m, while that segment returned to operating income of $1.9m from a $2.3m loss.
- Operating margin benefited from lower stock-based compensation and the absence of prior-year KSNET acquisition costs and a $2.6m unrealized foreign-exchange loss. These comparisons were also affected by a $4.0m non-cash gain from liquidation of SmartSwitch Nigeria in the current quarter.
- Comprehensive income attributable to Net1 was a loss of $17.8m, compared with income of $35.1m a year earlier, principally reflecting a $37.5m foreign-currency translation loss. Foreign-exchange movements also reduced reported goodwill by $21.2m during the quarter.
Outlook, management commentary, risks and unusual items
- SASSA contract: Net1’s South African social-grant contract was extended on existing terms through March 31, 2012 while the government tender process continued. Net1 submitted a proposal and extended its validity through that date. The outcome is unresolved and material given customer concentration: one customer represented 41% of quarterly revenue, versus 60% in the prior-year quarter.
- Business initiatives: Management is refocusing EasyPay on higher-margin value-added services and has discontinued certain inefficient processing activities. It expected SmartLife to begin writing policies in Q2 FY2012. XeoHealth expected to begin processing actual claims in December 2011; Banamex was expected to launch VCPay in Mexico in Q3 FY2012. These are expectations, not reported results.
- Acquisitions: SmartLife was acquired July 1, 2011, for approximately $1.8m; its preliminary purchase-price allocation was not final. It contributed approximately $0.03m of revenue and net income after acquisition. Subsequent to quarter-end, Net1 acquired Eason’s South African prepaid airtime and electricity businesses on October 3, 2011, for approximately $4.6m.
- Other unusual item: The $4.0m SmartSwitch Nigeria liquidation gain was non-cash; the company had ceased Nigerian operations because it could not implement its technology profitably. The gain reflects the write-back of assets and liabilities, subject to expected liquidation liabilities.
- Key risks: Management highlighted foreign-currency translation exposure, Korean floating-rate debt, equity-price and liquidity risk in its Finbond investment, and credit/reinsurance counterparty risk. A 1 percentage-point increase in the Korean CD rate was estimated to increase annual interest expense by about $1.1m. Reinsurance reduces exposure to insurance claims, but Net1 retains liability if reinsurers fail to perform. Capital commitments were $1.7m.
- Management reported no off-balance-sheet arrangements and concluded disclosure controls were effective as of September 30, 2011. The filing provides no specific consolidated earnings or revenue guidance.
Most important facts for an investor to verify
- Progress, timing and outcome of the SASSA tender, and the terms or duration of any further contract extension.
- How much of revenue and profit growth is recurring versus attributable to KSNET, currency translation, the Nigeria liquidation gain and ad hoc technology sales.
- KSNET’s operating performance, acquired-intangible amortization and debt repayment schedule, including the October 2011 installment.
- Whether SmartLife, XeoHealth and VCPay meet the launch expectations described, and the capital or operating costs required to scale them.
- Foreign-exchange effects on reported earnings, assets and equity, and the recoverability and valuation assumptions for reinsurance assets and the Level 3 Finbond investment.