LESAKA TECHNOLOGIES INC quarterly report, Q1 FY2018

Business context and reporting period

This is Net 1 UEPS Technologies, Inc.’s unaudited Form 10-Q for the three months ended September 30, 2017 (fiscal Q1 2018), compared with the three months ended September 30, 2016. The filing identifies the registrant as Net 1 UEPS Technologies, Inc.; the request metadata names Lesaka Technologies Inc.

Net1 reports three segments: South African transaction processing, international transaction processing, and financial inclusion and applied technologies. Most amounts below are U.S. dollars; financial statement amounts are in thousands unless stated otherwise.

Key financial metrics

• Interest income was $5.0 million, up 17%; interest expense was $2.1 million, up 166%, primarily reflecting borrowing to help fund the Cell C investment.
• Cash and cash equivalents were $138.4 million at September 30, down from $258.5 million at June 30, 2017. Total assets were $1.343 billion and total liabilities $629.1 million.
• Balance-sheet borrowings were approximately $140.0 million: $45.7 million short-term facilities and $94.2 million current and long-term borrowings. Cash slightly below total borrowings implies about $1.6 million net debt, before considering cash restrictions or other obligations. The company subsequently repaid its $16.3 million South Korean loan on October 20, 2017.
• Cash used in investing activities was $12.4 million, including $151.0 million for Cell C and $72.8 million for equity-accounted investments, largely offset in the cash-flow presentation by a $212.6 million net reduction in settlement assets. Financing activities used $103.1 million.
• Settlement assets and obligations were each $411.3 million at quarter-end; these balances fluctuate with timing of grant and payroll receipts and disbursements.

Material changes versus the prior comparable period

• Revenue fell as lower prepaid airtime and ad hoc terminal sales, and lower KSNET contribution following South Korean regulatory changes, outweighed growth in EPE, insurance, and other activities. South African transaction-processing revenue rose 15% in USD; financial inclusion and applied technologies revenue fell 15%; international transaction-processing revenue was nearly flat.
• Operating income declined across all three segments, while corporate/elimination costs rose to $6.6 million from $2.4 million. The current quarter included $1.5 million of transaction-related expenses; the prior-year quarter included a $1.8 million stock-compensation reversal.
• Equity-accounted investment earnings rose to $2.1 million from $0.7 million, including approximately $0.9 million from DNI after its acquisition. This partly offset lower operating income.
• Operating cash flow turned negative, principally reflecting a $39.1 million increase in accounts receivable, pre-funded grants receivable, and finance loans receivable, including growth in Masterpayment’s working-capital finance activity.
• Quarter-end cash fell mainly because of the Cell C and DNI investments and scheduled debt repayment. A weaker U.S. dollar against the South African rand supported reported USD results relative to underlying ZAR performance.

Outlook, management commentary, risks and unusual items

• Management said cash and credit facilities should be sufficient to fund operations for at least the next four quarters. No numerical earnings or revenue guidance was provided.
• The SASSA social-grant payment contract was scheduled to expire March 31, 2018. SASSA was considering a transition to the South African Post Office, but the parties had not reached agreement as of the filing’s discussion. Net1 said it continued making monthly payments to 10.7 million beneficiaries and would cooperate in a lawful handover. The contract transition remains a material business risk.
• Net1 acquired a 15% interest in Cell C for $151.0 million and a 45% interest in DNI for $72.0 million during the quarter. Up to a further $26.5 million may be payable to DNI subject to performance targets. The Cell C and DNI interests were pledged, among other assets, as security for South African financing.
• On October 2, 2017, after quarter-end, Net1 acquired 30% of Bank Frick for approximately $40.8 million and received a two-year option to acquire another 35%. The filing also lists a $9.0 million planned purchase of Cell C notes and an excluded commitment to invest approximately $15 million more in MobiKwik subject to contractual conditions.
• Legal matters include appeals by SASSA and Black Sash of a High Court ruling that social-grant recipients may authorize debit orders, and a separate Corruption Watch challenge to a payment of approximately ZAR 277 million for additional beneficiary-registration costs. The latter hearing was rescheduled to February 22, 2018. Management considered both claims without merit but could not predict outcomes.
• Other risks include currency translation exposure, credit and customer concentration risks in lending, interest-rate exposure, and guarantees. The maximum stated exposure under Nedbank counter-guarantees was $9.5 million; Net1 also guaranteed Masterpayment’s Bank Frick facilities, with a stated maximum potential amount of $45.7 million.
• The effective tax rate was 36.8%, above South Africa’s statutory rate, largely due to non-deductible transaction costs and interest. The company said it had no off-balance-sheet arrangements and no material impairment charges in the periods presented.

Important facts for investors to verify

1. Progress and final terms for the SASSA contract transition, including any effect on grant-payment operations, customer accounts, and related revenue.
2. Cash generation and receivables growth, particularly working-capital finance balances, collections, and credit-loss allowances.
3. Financing costs, repayment schedules, covenant compliance, and collateral pledged for the Cell C-related South African facilities.
4. Performance and valuation of the Cell C, DNI, Bank Frick, Finbond, and MobiKwik investments, including contingent or remaining funding commitments.
5. Developments and potential financial exposure in the SASSA/Black Sash appeal and Corruption Watch litigation.