Business context and reporting period
The supplied filing is a Form 10-Q for Net 1 UEPS Technologies, Inc. (not Lesaka Technologies Inc.), for the quarter and six months ended December 31, 2010. The three-month period is the company’s second quarter of fiscal 2011. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Net1 provides transaction processing, social-welfare payment distribution, smart-card accounts, financial services and payment technology. In October 2010, it acquired 98.73% of Korean payment processor KSNET for approximately $240.7 million. KSNET results were consolidated from November 1, 2010.
Financial performance and position
| Metric | Three months ended Dec. 31, 2010 | Six months ended Dec. 31, 2010 |
|---|---|---|
| Revenue | $89.0 million, up 21% year over year | $153.3 million, up 10% |
| Operating income / margin | $22.0 million / 25%, versus $29.4 million / 40% | $33.0 million / 22%, versus $55.8 million / 40% |
| Net income attributable to Net1 | $9.9 million; diluted EPS $0.22, down from $19.3 million and $0.42 | $17.4 million; diluted EPS $0.38, down from $37.2 million and $0.79 |
| Operating cash flow | $(8.1) million, versus $13.8 million provided | $22.1 million provided, versus $50.7 million |
For the six months, reported operating cash flow fell 56% year over year. Investing used $282.1 million, including $230.2 million for KSNET net of cash acquired; financing provided $163.4 million, principally from acquisition borrowings. Cash and cash equivalents were $71.4 million at December 31, 2010, down from $153.7 million at June 30, 2010.
Total assets were $770.5 million and total liabilities $432.1 million at December 31, 2010. Long-term borrowings were $107.9 million, with a $7.2 million current portion; the KSNET facility totaled approximately $115.1 million outstanding. The secured loans bear floating interest based on the Korean CD rate plus a margin and include financial covenants applicable to Net1 Korea and its subsidiaries. Net1 reported unused South African and Austrian short-term facilities.
Changes, outlook, risks and unusual items
- Revenue growth reflected KSNET and earlier acquisitions, higher EasyPay transaction volumes and increased activity in Iraq; it was partly offset by weaker hardware and technology sales and reduced SASSA contract economics. In constant-currency ZAR, revenue increased 11% in the quarter and 2% for the half year.
- Profitability weakened substantially. Management cited SASSA price and volume reductions, lower margins at KSNET and acquired businesses, higher selling and administrative costs, and increased amortization. The effective tax rate rose to 49.4% for the quarter and 47.6% for the half year, partly due to nondeductible acquisition-related costs.
- The SASSA contract, a major source of revenue and operating income, was extended on unchanged terms through September 30, 2011, pending a new tender process. One customer accounted for 45% of quarterly and 51% of six-month revenue.
- KSNET’s preliminary purchase-price allocation included $98.2 million of goodwill and $127.8 million of intangible assets and remained subject to adjustment. The company recorded $1.8 million of acquisition-related costs in the quarter and $5.1 million for the half year; additional costs were expected in the following quarter but not quantified.
- Quarter results included a $2.7 million unrealized foreign-exchange gain and $1.8 million of transaction costs. The half-year results included a net positive $0.3 million foreign-exchange impact and $5.1 million of transaction costs. Net1 also paid $13.6 million of South African secondary tax on intercompany dividends and expected a further $1.2 million payment in the next quarter.
- Management said cash and available facilities were sufficient for at least the next four quarters. This is management’s assessment, not formal earnings guidance. The EasyPay Kiosk pilot was extended through fiscal year-end for evaluation; no quantified earnings outlook was provided.
- Key risks include the SASSA tender and contract renewal, currency translation and transaction exposures, floating-rate debt, KSNET integration and acquisition accounting, customer concentration, and losses at equity-accounted ventures including VTU Colombia and VinaPay. Management reported disclosure controls effective as of December 31, 2010, with no material change in internal control during the quarter.
Important facts for investors to verify
- Confirm the issuer and filing identity: the request names Lesaka Technologies Inc., while this filing identifies Net 1 UEPS Technologies, Inc.
- Track the SASSA tender outcome, contract economics and exposure to the customer representing 45% of quarterly revenue.
- Assess whether acquired KSNET revenue and expected synergies can offset lower margins, amortization, financing costs and remaining transaction expenses.
- Review operating cash generation, post-acquisition liquidity, debt repayment and compliance with KSNET-related covenants.
- Verify the final KSNET purchase-price allocation and the valuation assumptions for acquired intangibles, goodwill and other Level 3 investments.