Business context and reporting period
Net 1 UEPS Technologies, Inc. (the filing’s registrant; not identified in the filing as Lesaka Technologies Inc.) filed this unaudited Form 10-Q for the three months ended September 30, 2014, its first quarter of fiscal 2015. The prior comparable period is the three months ended September 30, 2013. Figures below are in U.S. dollars unless stated otherwise.
The company operates in South African transaction processing, international transaction processing, and financial inclusion and applied technologies. The filing notes that fiscal 2015 excludes MediKredit and the NUETS business, while fiscal 2014 includes them for the full comparable period.
Key financial metrics
| Metric | Q1 FY2015 | Q1 FY2014 | Change |
|---|---|---|---|
| Revenue | $156.4 million | $123.5 million | +27% |
| Operating income | $33.1 million | $16.4 million | +102% |
| Operating margin | 21% | 13% | +8 percentage points |
| Net income attributable to Net1 | $24.1 million | $11.6 million | +108% |
| Basic and diluted EPS | $0.51 | $0.25 | More than doubled |
| Operating cash flow | $39.5 million | $(1.7) million | Improved |
| Capital expenditures | $9.4 million | $5.6 million | Higher |
Cost of goods sold, processing, servicing and support rose 32% to $74.4 million; selling, general and administrative expense declined 4% to $38.7 million. Income tax expense was $11.6 million and the effective tax rate was 32.4%, versus 36.1% in the prior period.
Cash and cash equivalents were $81.2 million at September 30, up from $58.7 million at June 30, 2014. Current assets were $1.02 billion and current liabilities were $810.4 million; both include $724.3 million of settlement assets and matching settlement obligations, which fluctuate with payment timing. Long-term borrowings were $61.3 million, with a further $14.3 million classified as current. The Korean loan facility’s carrying value was $75.6 million; its stated rate was 5.75%. The company had not drawn its South African or Korean overdraft facilities, though guarantees and foreign-exchange transactions used part of the South African facilities.
Comprehensive income attributable to Net1 was $2.7 million, down from $18.9 million, primarily reflecting a $21.2 million foreign-currency translation loss. The company reported $24.1 million of net income for the quarter.
Material changes versus the prior period
- Revenue and operating income increased across all three segments. Financial inclusion and applied technologies revenue rose 77% to $65.2 million; South African transaction processing rose 5% to $60.3 million; international transaction processing rose 15% to $43.2 million.
- Management attributed growth to increased prepaid airtime sales, more UEPS-based loans, higher SASSA cardholder payment volumes, South African payment-system transaction fees, and increased KSNET activity. Reported U.S.-dollar results were negatively affected by the stronger U.S. dollar against the rand; revenue grew 36% in rand terms.
- Financial inclusion segment operating margin declined to 27% from 35%, reflecting greater sales of low-margin prepaid airtime and competitively priced products. South African transaction processing margin rose to 23% from 11%; international transaction processing margin rose to 17% from 15%.
- Operating cash flow improved, including from working-capital movements. Investing cash flow was $(50.3) million, including a $43.1 million increase in settlement assets; financing cash flow was $37.4 million, including a matching $43.1 million increase in settlement obligations.
- The company repurchased 1,837,432 shares from BVI for approximately $9.2 million. BVI separately subscribed for a 12.5% interest in CPS for approximately $1.4 million. Shares outstanding, net of treasury shares, were 46.5 million at September 30.
Outlook, commentary, risks and unusual items
- Management said existing cash and credit facilities were expected to fund operations for at least the next four quarters. No specific earnings or revenue guidance was provided. Planned second-quarter fiscal 2015 capital spending was primarily for Korean payment terminals; outstanding capital commitments were $0.3 million.
- The SASSA social-grant payment contract is a major risk. A new five-year tender process was underway, with proposals due December 12, 2014. The company could not predict the timing or result; losing the award, or receiving materially less favorable terms, could significantly harm its business and related cardholder services.
- The South African National Credit Regulator sought cancellation of Moneyline’s credit-provider registration, alleging violations involving loan affordability assessments and documentation. The company disputed the allegations; cancellation could prevent UEPS-based lending and materially affect results and cash flows.
- A securities class-action complaint naming the company, its CEO and CFO seeks unspecified damages. The company said it considers the suit without merit and intends to defend it. Management believed resolution of disclosed legal matters would not materially adversely affect the company, but outcomes are uncertain.
- The company provided guarantees through a South African bank with a maximum potential payment of ZAR 135.0 million (approximately $12.0 million); no related obligation was recognized. It also disclosed currency, interest-rate, credit, and liquidity risks, including exposure from its largely rand-based operations and dollar reporting currency.
- Quarterly results included a $21.2 million foreign-currency translation loss in other comprehensive income. The filing also reports $1.9 million of proceeds received from the NUETS business sale.
Important facts for investors to verify
- Confirm the registrant and period: this filing names Net 1 UEPS Technologies, Inc. and covers the quarter ended September 30, 2014.
- Track the SASSA tender outcome, contract terms, and any challenges to a future award.
- Monitor the National Credit Regulator proceeding and its potential effect on Moneyline’s lending operations.
- Assess whether revenue and operating-income growth persists, particularly in financial inclusion, and account for low-margin product mix and currency movements.
- Review cash generation alongside settlement-related balances, capital spending, share repurchases, and the scheduled Korean debt repayments.