Business context and reporting period
This filing is a Form 10-Q for Net 1 UEPS Technologies, Inc. (the registrant named in the filing), for the quarter and nine months ended March 31, 2016. The request metadata names Lesaka Technologies Inc.; the supplied filing does not identify Lesaka as the registrant. Financial statements are unaudited and presented in U.S. dollars unless noted.
Net1 operates South African and international transaction-processing businesses and financial-inclusion and applied-technology services. Its South African initiatives include EPE accounts, ATMs, branches, lending and insurance.
Key financial metrics
| Metric | Three months ended March 31, 2016 | Nine months ended March 31, 2016 |
|---|---|---|
| Revenue | $134.7 million; down 11% year over year | $439.5 million; down 5% |
| Operating income | $26.2 million; down 18% | $82.2 million; down 14% |
| Operating margin | 19%, versus 21% in 2015 | 19%, versus 21% in 2015 |
| Net income attributable to Net1 | $18.4 million; down 24% | $58.1 million; down 18% |
| Basic / diluted EPS | $0.40 / $0.40, versus $0.52 / $0.52 | $1.24 / $1.23, versus $1.51 / $1.51 |
| Operating cash flow | $49.2 million, versus $49.3 million | $81.3 million, versus $103.4 million |
| Capital expenditures | $8.1 million | $28.7 million, versus $24.8 million |
At March 31, cash and cash equivalents were $123.3 million, total borrowings were approximately $61.0 million, and equity was $479.6 million. Cash exceeded borrowings by about $62.3 million. Settlement assets and obligations were each $484.5 million and are timing-related balances. Management said cash and credit facilities should fund operations for at least the next four quarters. The company reported no off-balance-sheet arrangements.
Material changes and management commentary
- Reported U.S.-dollar revenue and earnings declined, while revenue rose 20% in South African rand for both the quarter and nine-month period. Management attributed much of the difference to U.S.-dollar strength against the rand and won, which reduced translated results.
- South African growth in EPE, ATM usage, payment-network fees and airtime sales was partly offset by lower lending fees and ad hoc terminal sales. The new offerings and branch expansion increased costs and pressured margins; management said those largely fixed costs may weigh on margins until the businesses scale.
- South African transaction-processing revenue rose 18% in rand for the quarter. Financial inclusion and applied technologies revenue fell 19% in U.S. dollars, while its operating income fell 36%, reflecting currency translation and launch and expansion costs.
- Quarterly results included a $1.9 million gain related to gaining control of T24. The prior-year quarter included a $1.7 million refund tied to Korean industry-wide litigation, making the comparison less favorable.
- Net cash declined from $103.4 million to $81.3 million year over year for the nine-month period. Management cited expansion of the lending book, while trading activity generated cash inflows.
- Quarterly effective tax rate was 34.2%, versus 29.2%. The filing cites nondeductible expenses and withholding taxes on distributions from a South African subsidiary; the nine-month effective rate was 34.6%, versus 30.8%.
Outlook, transactions and risks
- No formal revenue or earnings guidance is provided. Management expected further ATM and branch expansion and South Korean payment-terminal investment in fiscal 2016’s fourth quarter; capital spending was expected to be funded internally.
- EPE had more than 1.087 million active accounts at April 30, 2016, versus 830,000 at January 31. The company reported approximately 85,000 new Smart Life policies sold through April 30. It also noted softer loan demand amid tougher South African economic conditions, rising food prices and currency weakness.
- After quarter-end, Net1 acquired 60% of Germany-based Masterpayment for approximately $10 million. It also signed an agreement for IFC investors to buy about 9.98 million shares at $10.79 each, for approximately $107.7 million gross proceeds, with closing expected May 11, 2016. The issuance would dilute existing holders. Investors also received board nomination or observer, registration and preemptive rights, plus a conditional put right that could require the company to repurchase their shares and affect liquidity.
- Currency translation, credit risk in unsecured microlending, execution costs for new businesses, and the valuation of the Finbond investment are notable risks. Net1 reported $8.7 million of guarantees issued through its bank facility; ordinary-course claims were described as not expected to have a material adverse effect.
- The company restated its June 30, 2015 balance sheet to reclassify approximately $27.4 million from current accounts receivable to other long-term assets. It said the correction did not affect previously reported income, comprehensive income or cash flows.
Important facts for investors to verify
- Confirm the registrant and reporting period: the supplied filing names Net 1 UEPS Technologies, Inc. and covers the quarter ended March 31, 2016, despite the request metadata naming Lesaka Technologies Inc. and “2015 Q3.”
- Review the drivers of the 19% operating margin and whether EPE, ATM, insurance and branch investments can scale sufficiently to offset launch costs.
- Assess the effects of currency movements and South African operating conditions on reported U.S.-dollar results, liquidity and loan demand.
- Confirm completion and terms of the IFC share issuance, including dilution and the potential cash obligation under its conditional put rights.
- Track operating cash flow, lending-book growth, capital spending, debt repayments and the final purchase-price allocations for T24 and Masterpayment.