Business context and reporting period
The supplied filing is for Net 1 UEPS Technologies, Inc., not Lesaka Technologies Inc. It is a Form 10-Q for the quarter ended March 31, 2018—the company’s fiscal third quarter of 2018—and reports unaudited results for the three and nine months ended on that date. Amounts below are U.S. dollars unless stated otherwise; financial statement amounts are in millions unless noted.
Net1 operates across South African transaction processing, international transaction processing, and financial inclusion and applied technologies. Its activities include social-grant payment services, payment processing, accounts, lending and insurance.
Financial performance and condition
| Metric | Three months ended March 31, 2018 | Nine months ended March 31, 2018 |
|---|---|---|
| Revenue | $162.7 million, up 10% year over year | $463.7 million, up 2% |
| Operating income | $7.6 million, down 69%; 5% operating margin | $48.9 million, down 41%; 11% operating margin |
| Net income attributable to Net1 | $3.0 million, down 84%; diluted EPS $0.05 | $32.1 million, down 48%; diluted EPS $0.56 |
| Operating cash flow | $85.2 million | $97.8 million, versus $91.4 million in the prior-year period |
- A $19.9 million goodwill impairment related to Masterpayment materially reduced operating income. Excluding that charge, management said quarterly operating margin would have been 17%, versus 17% in the prior-year quarter.
- Quarterly income tax expense was $10.9 million, producing a 106.3% effective tax rate; the nine-month rate was 55.0%. Management cited the impairment, nondeductible expenses and other tax effects.
- Cash and cash equivalents were $87.2 million at March 31, 2018, down from $258.5 million at June 30, 2017. Total assets were $1.40 billion and total liabilities $568.2 million. Long-term borrowings were $75.5 million; short-term credit facilities were $3.4 million.
- Nine-month investing cash outflow was $30.0 million, including investments in Cell C, DNI and Bank Frick. Financing cash outflow was $243.6 million, largely reflecting debt repayments and settlement-related movements.
- Settlement assets and obligations were each $394.1 million at March 31, 2018. These matched balances arise from grant and payroll funds held for disbursement and should be distinguished from funds freely available to the company.
Material changes versus the prior comparable period
- Quarterly revenue increased in reported dollars, but management’s supplemental presentation showed a 1% decline in South African rand. Nine-month revenue rose 2% in dollars but fell 5% in rand, reflecting currency translation and underlying business mix.
- Quarterly and nine-month earnings declined sharply, driven by the Masterpayment impairment, higher selling and administrative costs, and higher interest expense following borrowing to fund investments. Nine-month results also included a $7.8 million allowance for doubtful Masterpayment working-capital finance receivables.
- International transaction processing reported an operating loss of $14.9 million for the quarter and $14.6 million for the nine months, compared with operating income in the prior-year periods. South Korean card-fee regulation changes and Masterpayment charges were among the factors.
- Equity-accounted investment earnings increased to $4.0 million for the quarter and $7.4 million for the nine months, principally reflecting DNI and Bank Frick. Net1 acquired 15% of Cell C and built stakes in DNI and Bank Frick; these investments materially changed the balance sheet and use of cash.
Outlook, management commentary and risks
- Management said cash and credit facilities were sufficient to fund operations for at least the next four quarters. The filing does not provide quantitative earnings or revenue guidance. Planned fourth-quarter capital spending principally concerned Korean payment terminals and South African ATMs and branches.
- The SASSA cash-grant contract was extended by court order through September 30, 2018. Compensation for the extension remained uncertain pending a Constitutional Court decision on National Treasury’s fee recommendation. Net1 warned that inadequate minimum payments could make the operation loss-making and threaten its ability to continue.
- The company reported that a South African High Court ordered CPS to repay ZAR 317 million plus interest to SASSA relating to past implementation-cost reimbursements. The High Court rejected CPS’s application for leave to appeal; CPS said it was pursuing leave to appeal at the Supreme Court of Appeal. Outcome and potential financial impact remain uncertain.
- Net1 stated it intended to focus on financial inclusion services after the SASSA contract ends. It reported more than 2.6 million active EasyPay Everywhere accounts at April 30, 2018, but continuation and growth of these activities do not remove the near-term contract and transition risks.
- Further risks include execution and valuation of the Cell C and DNI investments, credit losses in lending, South Korean regulatory pressures, currency fluctuations, and possible additional impairments. Cell C’s $207.0 million reported fair value relied on significant unobservable valuation inputs.
- The filing describes a contingent DNI payment of up to ZAR 400 million, subject to performance targets and transaction conditions. It also reports $9.1 million of guarantees supporting third-party obligations and $0.5 million of capital commitments.
Most important facts for investors to verify
- Confirm the issuer and reporting period: the supplied document is Net 1 UEPS Technologies’ fiscal Q3 2018 filing, despite the request metadata naming Lesaka Technologies Inc. and 2017 Q3.
- Check the final SASSA contract-extension compensation, contract transition after September 30, 2018, and any effect on CPS operations and earnings.
- Track the appeal and potential repayment, including interest, of ZAR 317 million to SASSA.
- Assess whether Masterpayment’s impairment and credit-loss allowance fully capture remaining exposure, and monitor international segment profitability.
- Review cash available after investment commitments and debt maturities, including the DNI contingent payment and Cell C/DNI investment performance.