Business context and reporting period
The filing is a Form 10-Q for Net 1 UEPS Technologies, Inc. for the quarter ended March 31, 2013, the third quarter of its fiscal year ending June 30, 2013. The request metadata names Lesaka Technologies Inc.; the filing itself identifies the registrant as Net 1 UEPS Technologies, Inc.
Net1 provides payment processing, social-grant distribution, smart-card, financial-services, and related technology services. The South African Social Security Agency (SASSA) contract is a major business driver.
Financial performance and position
Amounts below are in U.S. dollars; financial statement amounts are rounded to millions.
| Metric | Three months ended March 31, 2013 | Prior-year quarter | Nine months ended March 31, 2013 | Prior-year nine months |
|---|---|---|---|---|
| Revenue | $111.1 million | $90.7 million | $334.3 million | $282.6 million |
| Operating income (loss) | $(4.7) million | $12.5 million | $9.6 million | $63.6 million |
| Net income (loss) attributable to Net1 | $(4.7) million | $7.8 million | $4.7 million | $52.6 million |
| Net earnings (loss) per share | $(0.10) | $0.17 | $0.10 | $1.17 |
| Cash provided by operating activities | $12.2 million | $22.0 million | $31.0 million | $43.0 million |
- Quarter revenue rose 23%, but cost of goods sold and servicing grew 58% and selling, general and administrative expense grew 48%. Operating margin moved to negative 4% from positive 14%. Management attributed the deterioration chiefly to SASSA implementation spending, $4.2 million of DOJ/SEC investigation-related legal expense, and a $2.3 million provision for Iraqi customer receivables.
- For the nine-month period, revenue increased 18%, while operating income fell 85%; operating margin was 3% versus 22% a year earlier. The prior-year comparison included a $4.0 million non-cash gain on liquidation of SmartSwitch Nigeria and a tax benefit related to a South African tax-law change.
- At March 31, cash and cash equivalents were $42.6 million, compared with $39.1 million at June 30, 2012. Total assets were $1.073 billion and total liabilities $729.3 million. Settlement assets and obligations were each $538.3 million; these balances reflect funds held and due for grant, healthcare, and payroll disbursements and fluctuate with payment timing.
- Long-term Korean borrowings were $89.8 million, with $14.5 million classified as current and $75.3 million long-term on the balance sheet. The Korean loan rate was 6.94%. The separate South African credit facility of approximately $27 million was undrawn. Management said cash and available facilities should fund operations for at least the next four quarters.
- Nine-month investing cash flow was a $186.7 million outflow, largely reflecting a $168.4 million increase in settlement assets; financing cash flow was a $161.4 million inflow, principally the matching increase in settlement obligations. Capital expenditures were $17.1 million year to date.
Material changes and operating developments
- SASSA-related growth lifted South African transaction-based revenue; higher KSNET contributions also supported revenue. The company said the U.S. dollar strengthened 8% against the rand during the quarter and year to date, adversely affecting reported results.
- Net1 substantially completed bulk enrollment for the new national SASSA contract by March 31, reporting 19.0 million people enrolled, including approximately 8.5 million grant recipients. The enrollment deadline was extended to April 30. Management reported $48.2 million of direct implementation expense and $9.2 million of card expense year to date, and cumulative implementation capital spending of $26.6 million.
- The smart-card account base reached approximately 6.6 million active accounts, versus 3.5 million a year earlier. Lower pricing under the new contract reduced the average monthly fee per account from ZAR 5.50 to ZAR 4.00 and reduced segment margins.
- Net1 acquired the remaining 50% of SmartSwitch Botswana, making it wholly owned, and acquired Pbel, a software-development company. Purchase price allocations remained preliminary. Pbel was previously owned by the CEO and his son; the filing describes the relationship and acquisition consideration, including performance-based shares.
Outlook, risks, contingencies, and unusual items
- Management expected no further significant capital spending for bulk SASSA enrollment and forecast cumulative implementation capital expenditures below its prior estimate of $30 million. Fourth-quarter capital spending was expected to include SASSA computer equipment and Korean payment terminals. No full-year earnings or revenue guidance was provided.
- AllPay applied for leave to appeal the Supreme Court of Appeal ruling that upheld the SASSA award. Net1 and SASSA opposed the application; the contract remained in effect at the filing date, but the outcome and any further appeal were uncertain.
- The DOJ and SEC were investigating potential FCPA, other criminal-law, and securities-law issues relating to the SASSA contract. Net1 said it was cooperating, had incurred $4.8 million of investigation-related legal expense year to date, and could not predict the outcome or ultimate costs. The company also reported a South African police investigation prompted by its own application concerning media corruption allegations.
- South Africa’s Financial Services Board suspended Smart Life’s life-insurance license in January 2013, prohibiting new long-term policies. Net1 was seeking to have the suspension lifted but could not predict the outcome.
- Net1 stopped processing for its Iraqi customer after the customer said it would not renew its contracts. The company provided $2.3 million against overdue receivables and was pursuing recovery. XeoHealth expected to recognize North Dakota recovery-audit revenues in fiscal Q4, but could not quantify them.
- Net1’s BEE consortium option to purchase 8,955,000 shares at $8.96 expired unexercised on April 19, 2013. The $14.2 million option charge had already been recognized in fiscal 2012 and will not be reversed; the company said it was evaluating alternatives to meet BEE objectives.
- Other risks include currency translation, Korean market competition and geopolitical tensions, possible Korean debt-covenant pressure, and reinsurance counterparty exposure. The filing reported no outstanding foreign-exchange contracts and no off-balance-sheet arrangements.
- An immaterial prior-period balance-sheet classification error was corrected by reclassifying $2.0 million between other payables and additional paid-in capital; it did not affect previously reported income, comprehensive income, or cash flows.
Important facts for investors to verify
- Confirm the filing entity and ticker: the supplied metadata says Lesaka Technologies, while this 2013 filing names Net 1 UEPS Technologies, Inc.
- Track the Constitutional Court’s handling and outcome of AllPay’s SASSA appeal, and the continuing status and economics of the SASSA contract.
- Monitor DOJ/SEC investigation developments, related legal spending, and any potential impact on contracts, reputation, or regulatory approvals.
- Assess post-enrollment SASSA costs, cardholder payment volumes, margins, and whether cash generation improves after implementation spending subsides.
- Review the recoverability of the $2.3 million Iraqi receivable, the Smart Life license appeal, and progress toward BEE objectives after the option expired.
- Reconcile operating cash flow and liquidity with settlement-fund movements, Korean debt maturities and covenants, and cash held in rand and won.