NET 1 UEPS Technologies, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended December 31, 2012; comparisons are with the periods ended December 31, 2011. The filing identifies the registrant as NET 1 UEPS Technologies, Inc.; the supplied company name, Lesaka Technologies Inc., does not appear in the filing. Unless noted otherwise, financial amounts below are in U.S. dollars.
Financial performance
| Metric | Three months ended Dec. 31, 2012 | Six months ended Dec. 31, 2012 |
|---|---|---|
| Revenue | $111.4 million, up 21% | $223.1 million, up 16% |
| Operating income | $5.0 million, down 75%; 4% margin versus 22% | $14.3 million, down 72%; 6% margin versus 27% |
| Net income attributable to Net1 | $2.6 million, down 90%; diluted EPS $0.06 versus $0.56 | $9.4 million, down 79%; diluted EPS $0.21 versus $1.00 |
| Operating cash flow | Cash used of $6.9 million | Cash provided of $18.8 million versus $21.0 million |
| Investing cash flow | Cash used of $78.4 million | Cash used of $25.3 million |
For the quarter, cost of goods sold and SG&A rose 38% and 69%, respectively. Management attributed the margin and earnings decline principally to costs of implementing the new South African Social Security Agency (SASSA) contract. The prior-year quarter also included an $11.8 million net tax benefit from a South African tax-law change; the current-quarter effective tax rate was 53.6%. For the six months, the stronger U.S. dollar also reduced reported results; revenue grew 26% in rand terms versus 16% in U.S. dollars.
South African transaction-based activities generated 55% of quarterly revenue. Quarterly revenue in that segment rose 31% in U.S. dollars, while segment operating income fell 88%. International transaction-based revenue rose 15%, but six-month segment operating income fell to $31,000 from $925,000, reflecting competition and other operating costs. Smart card accounts revenue increased, but lower pricing reduced margins.
Financial position and liquidity
At December 31, 2012, cash and cash equivalents were $38.1 million, compared with $39.1 million at June 30, 2012. Total assets were $980.4 million and total liabilities $610.1 million. The balance sheet included $414.6 million of settlement assets and an equal amount of settlement obligations; these balances vary with payment timing and should be distinguished from funds available for general operations.
Long-term borrowings were approximately $94.2 million, including $15.2 million classified as current and $79.0 million long-term on the balance sheet. The Korean secured facility carried a 6.95% rate at quarter-end; a $7.3 million scheduled repayment was made in October 2012, and the next approximately $7.6 million repayment was due in April 2013. A $29.5 million South African short-term credit facility was undrawn. Management said cash and credit facilities should fund operations for at least the next four quarters, including completion of SASSA implementation.
Six-month capital expenditures were $12.1 million. Capital commitments at December 31 were $3.5 million, primarily for SASSA-related computer equipment. The company reported no off-balance-sheet arrangements.
Developments, outlook, and risks
- SASSA implementation: The company enrolled 9.5 million grant recipients and associated beneficiaries by December 31 and said it planned to be substantially complete by March 2013. The number of beneficiaries requested for enrollment had increased, prompting temporary staffing to rise to approximately 5,500. Second-quarter direct implementation costs were about $18.0 million, plus $3.0 million for smart cards; first-half costs were $32.1 million and $4.7 million, respectively. Management expected implementation spending to decline slightly in the third quarter as work shifted toward urban areas. Cumulative implementation capital expenditures were $25.2 million; the expected total was approximately $30 million.
- SASSA contract litigation: The High Court ruled that the tender process was invalid but did not set aside the company’s contract. All parties appealed; the Supreme Court of Appeal hearing was scheduled for February 15, 2013. A successful AllPay appeal could put the contract at risk. The company separately sought ZAR 478 million (approximately $55 million) in damages from AllPay.
- DOJ and SEC investigations: The company disclosed investigations into possible FCPA, other federal criminal-law, and securities-law violations relating to the SASSA contract and related statements. It said it was cooperating. Outcomes, potential penalties, legal costs, and business effects were uncertain; approximately $0.5 million of quarterly legal and accounting costs was reported.
- Other operating outlook: XeoHealth expected to begin recognizing North Dakota recovery-audit revenue in the third quarter, but the amount was not quantifiable; Missouri work was subject to customer sign-off. The company was developing VCPay and pursuing mobile virtual-card opportunities in Spain and India, without quantified revenue guidance. No formal consolidated earnings or revenue guidance is provided in the filing text.
- Other exposures and unusual items: The SASSA award appeal, investigations, currency translation, Korean interest rates, and the liquidity and valuation of the company’s Level 3 Finbond investment are key risks. The company acquired Pbel, a software developer previously owned by the CEO and his son, for approximately $3.8 million, with up to $10 million payable in shares depending on performance milestones. The company also acquired the remaining 50% of SmartSwitch Botswana. Purchase-price allocations were preliminary.
- BEE option: A consortium held an option to buy 8,955,000 shares at $8.96, expiring April 17, 2013. The company said the then-current share price made exercise unlikely; extension could trigger an additional non-cash accounting charge, and the prior $14.2 million charge would not be reversed if the option expired unexercised.
Most important facts for investors to verify
- Progress, remaining costs, and economics of SASSA implementation, including whether enrollment was completed on schedule.
- Outcomes of the DOJ and SEC investigations and the SASSA contract appeals, including potential effects on the contract, reputation, costs, and operations.
- Whether revenue growth converts into improved operating margins and cash generation after implementation spending.
- Debt repayment capacity, working-capital needs, and cash available after excluding matched settlement balances.
- Exercise or expiration of the BEE option, and the final purchase-price allocations and performance-based consideration for acquisitions.