SEC filing summary
Filing and period: The supplied filing is Net 1 UEPS Technologies, Inc.’s Form 10-K for the fiscal year ended June 30, 2018, filed September 12, 2018. This does not match the request metadata identifying LESAKA TECHNOLOGIES INC. and “2017 Q4”; the filing text does not provide a clear connection between those labels and this report.
Business context
Net1 provides payment processing, financial inclusion products and services, and payment technology. Its businesses include South African transaction processing and financial services, South Korean processor KSNET, and international payment operations. The company reported more than 300,000 merchants and over three billion transactions processed annually. Results are reported in U.S. dollars, while the South African rand is the functional currency for most operations.
Financial performance
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Revenue | $612.9 million | $610.1 million | Approximately flat in U.S. dollars; down 6% in rand |
| Operating income | $58.9 million | $97.0 million | Down 39% |
| Operating margin | 9.6% | 15.9% | Down 6.3 percentage points |
| Net income attributable to Net1 | $39.2 million | $73.0 million | Down 46% |
| Diluted EPS | $0.69 | $1.33 | Down 48% |
| Operating cash flow | $132.6 million | $97.2 million | Up 36% |
| Cash and cash equivalents at year-end | $90.1 million | $258.5 million | Down $168.4 million |
International transaction processing generated a $12.5 million operating loss, compared with $13.7 million of operating income in FY2017. South African transaction processing operating income fell 28% to $42.8 million, while financial inclusion and applied technologies operating income declined 4% to $55.4 million. Segment revenue figures include intersegment sales and therefore do not sum to consolidated revenue.
Interest income was $17.9 million, down from $20.9 million; interest expense rose to $8.9 million from $3.5 million. The effective tax rate increased to 60.9% from 37.1%. Equity-accounted investment earnings rose to $11.7 million from $2.7 million.
Net cash used in financing activities was $473.5 million, including scheduled debt repayments and a large net reduction in settlement obligations. The cash flow statement reports net investing cash inflow of $180.4 million, principally reflecting a $490.8 million reduction in settlement assets; excluding that settlement movement, investing cash use included major strategic investments. The company spent approximately $151.0 million on a 15% Cell C interest, $51.9 million on a 35% Bank Frick interest, and made investments in DNI and other assets. Capital expenditures were $9.6 million.
At June 30, 2018, reported borrowings comprised $44.7 million current and $5.5 million long-term. Net1 also had $90.1 million cash and $29.2 million of available Nedbank short-term facilities, of which $7.9 million supported guarantees. DNI had an undrawn ZAR 200 million revolving facility. Current assets before settlement assets were $277.8 million, versus current liabilities before settlement obligations of $133.5 million. Settlement assets and obligations were each $149.0 million and are not available for general liquidity needs.
Material changes and unusual items
- The SASSA social-grant distribution contract was extended by court order only through September 30, 2018, for cash pay-point recipients. The company expected the contract to end then; CPS expected to discontinue operations, and Net1 anticipated losing related revenue and grant-linked bank-account revenue.
- Net1 recorded a $20.9 million goodwill impairment, mainly relating to Masterpayment, and an $8.4 million allowance for doubtful working-capital finance receivables (management’s discussion cites approximately $7.8 million). It also recorded a $4.6 million non-cash loss on remeasurement of its previously held DNI interest.
- Net1 acquired control of DNI at fiscal year-end, raising its ownership to 55%; DNI was consolidated from June 30 and did not contribute subsidiary revenue for FY2018. A further payment of up to $29.1 million is contingent on DNI meeting performance targets.
- Revenue benefited from a weaker U.S. dollar against the rand and won. In rand terms, revenue declined 6%, reflecting lower SASSA grant volumes, prepaid sales and terminal sales, partly offset by growth in EPE and other processing and insurance activities.
- South Korean regulation reducing permissible card transaction fees continued to pressure KSNET. Masterpayment’s cryptocurrency processing activity grew, but the company exited its working-capital finance offering and impaired related goodwill.
- The company’s independent auditor issued an unqualified opinion on the financial statements, but an adverse opinion on internal control over financial reporting. A material weakness concerned recognition of SASSA cash-payment revenue in the quarter ended June 30, 2018; DNI was excluded from the controls assessment because it was acquired at year-end.
Outlook, risks and contingencies
Management stated that cash and available credit facilities were sufficient to fund operations for at least the next four quarters. It planned to focus on financial inclusion services, including EasyPay Everywhere (EPE), after the SASSA contract ended. EPE accounts exceeded 3.0 million by July 31, 2018, though the company reported account churn as some grant recipients were moved to SAPO accounts. Management expected depreciation and amortization to rise in FY2019, partly because of DNI-related intangible assets and investment in branches and ATMs. The filing provides no specific consolidated revenue or earnings guidance.
Key exposures include the SASSA contract’s termination and uncertain compensation for its final months; litigation over repayment of ZAR 317.0 million plus interest for reimbursed implementation costs (appeal pending); challenges to the company’s debit-order and microlending practices; and an NCR application seeking cancellation of Moneyline’s credit-provider registration. Management could not predict these legal outcomes. Other notable risks include debt covenant compliance, credit losses on consumer and working-capital loans, rand exchange-rate movements, regulatory and reputational scrutiny in South Africa, and execution of the Cell C and DNI investments.
The company reported a $2.5 million South Korean indirect-tax refund and a $19.9 million Masterpayment-related goodwill impairment. It did not pay dividends and said it intended to retain earnings for debt repayment and business expansion.
Important facts for investors to verify
- Confirm the company and period: this is a Net 1 UEPS Technologies FY2018 10-K, not an identified LESAKA Technologies 2017 Q4 report.
- Track the final SASSA contract payment, the court’s pricing decision, the contract’s September 30, 2018 expiry, and any transition or residual revenue obligations.
- Review the status and potential financial effect of the ZAR 317.0 million repayment order, related interest, and pending appeal.
- Assess the SASSA revenue-recognition material weakness, remediation actions, and DNI’s integration into internal controls.
- Monitor loan-book credit quality and allowances, debt covenants and repayments, and the contingent DNI consideration of up to $29.1 million.
- Test whether EPE growth and other businesses can offset the loss of SASSA-related revenue, and whether Cell C and DNI investments deliver expected returns.