Lesaka Technologies Inc. (formerly Net 1 UEPS Technologies, Inc.) — Form 10-Q Summary
Period clarification: The supplied filing is for the quarter ended March 31, 2019 (fiscal 2019 Q3), not 2018 Q3. Amounts below are U.S. dollars unless noted; financial statement amounts are in thousands.
Business context and reporting period
The company provides transaction processing, financial inclusion, lending, insurance and payment technology services, with major operations in South Africa and international markets. The filing presents the three and nine months ended March 31, 2019, against restated 2018 comparatives. DNI was classified as a discontinued operation after the company sold a controlling interest and deconsolidated it on March 31, 2019.
Key financial metrics
| Metric | Three months ended March 31 | Nine months ended March 31 |
|---|---|---|
| Revenue | $86.5 million, down 47% from $162.7 million | $309.5 million, down 33% from $463.7 million |
| Operating income (loss) | $(21.7) million, versus $7.6 million income | $(63.9) million, versus $48.9 million income |
| Operating margin | (25.1%), versus 4.6% | (20.6%), versus 10.5% |
| Net income (loss) attributable to Net1 | $(54.8) million; $(0.96) per share | $(123.9) million; $(2.18) per share |
| Operating cash flow | $(14.1) million, versus $84.9 million provided | $(2.9) million, versus $97.5 million provided |
At March 31, 2019, cash and cash equivalents were $48.8 million, with a further $74.2 million classified as restricted cash for ATM funding. Total current assets were $302.4 million and current liabilities $222.7 million; both included matching settlement assets and obligations of $66.2 million. Borrowings comprised $83.0 million of short-term credit facilities and $15.8 million of current long-term borrowings. The company reported no long-term borrowings at that date. Total assets were $839.8 million and total equity was $500.8 million.
For the nine-month period, investing activities provided $63.1 million, largely reflecting a net reduction in settlement assets; financing activities used $21.4 million. Cash, cash equivalents and restricted cash increased by $32.9 million to $122.9 million. The company recorded a $42.1 million nine-month loss from fair-value changes in equity securities, principally its Cell C investment, and a $13.5 million impairment loss. Nine-month selling, general and administrative expense included a $23.4 million increase in the allowance for doubtful finance loans receivable.
Material changes versus the prior comparable period
- Revenue fell sharply following the September 2018 expiry of the SASSA grant-distribution contract and SASSA’s migration of EPE account holders to South African Post Office accounts. In constant local-currency terms, management reported revenue declines of 37% for Q3 and 26% year to date.
- South African transaction processing shifted from profit to loss: Q3 segment operating loss was $13.0 million, compared with $12.7 million profit a year earlier. Management cited the loss of grant-related activity and high fixed costs.
- The company incurred a $26.3 million Q3 fair-value loss on Cell C, compared with a $37.8 million gain in the restated prior-year quarter. The Cell C investment’s carrying value was $121.9 million at March 31, down from $172.9 million at June 30, 2018.
- Other notable items included a $5.1 million loss on the DNI disposal, a $5.3 million impairment of DNI-related customer relationships, and $4.5 million of Q3 employee retrenchment costs. A $2.6 million Q3 impairment on the Cedar Cellular note contributed to negative net interest income.
- Prior-year results were restated to record the Cell C fair-value gain in the income statement rather than other comprehensive income. The restated 2018 nine-month net income was $62.4 million.
Outlook, management commentary and risks
- Management said it had reduced more than 2,500 employees, nearly half of the original workforce, and was reducing physical infrastructure and leases. It targeted monthly breakeven by the end of fiscal Q4 2019, described in different passages as EBITDA breakeven and cash-basis breakeven.
- Management stated that cash and credit facilities were expected to fund operations for at least the next four quarters. However, operating cash flow was negative in Q3 and ATM funding relied heavily on short-term facilities. The company reported that it repaid its ZAR 230 million South African long-term borrowing in full on May 3, 2019, after quarter-end, using proceeds from a further DNI share sale and cash reserves.
- The company sold 17% of DNI in March, reducing its stake from 55% to 38%, and sold a further 8% in May, leaving a 30% interest. It granted DNI a call option over that remaining interest; management expected exercise within eight months. The May transactions are subsequent events, not March 31 balance-sheet events.
- Further EPE account migration remains a material risk to the South African financial-services business. The company is appealing a January 2019 court ruling on account transfers and pursuing a separate pricing dispute with SASSA for services provided through September 2018. Management had not recorded additional revenue for disputed fees pending agreement or resolution.
- A South African High Court order requires CPS to refund ZAR 317 million, including VAT, plus interest, relating to a 2012 SASSA variation agreement. The company’s appeal was granted leave and was expected to be heard in 2019; the outcome and potential financial impact remain uncertain.
- Disclosure controls were deemed ineffective as of March 31, 2019, because the company had not had sufficient time to assess remediation of a material weakness in review controls for complex, non-routine transactions. The weakness was associated with prior revenue-accounting errors and the Cell C accounting restatement.
- Other risks include foreign-exchange exposure, loan-credit losses, reliance on short-term ATM facilities, and valuation uncertainty in Cell C. The company also reported a $6.6 million maximum potential payment under counter-guarantees to Nedbank; no related obligation was recognized on the balance sheet.
Most important facts for investors to verify
- Whether the South African restructuring delivers the stated Q4 fiscal 2019 breakeven target and how that target is defined.
- Whether EPE account levels stabilize, and the outcomes of the SASSA migration and fee disputes, including the potential ZAR 317 million refund obligation.
- Whether cash generation improves and how much of reported cash is restricted or dependent on short-term ATM funding facilities.
- Completion and proceeds of the DNI transactions, exercise of the call option, and the effect of the post-quarter debt repayment.
- Valuation assumptions for Cell C and any further credit-loss or goodwill impairments.
- Progress in remediating the material weakness and restoring effective disclosure controls.