Business context and reporting period
The filing is Net 1 UEPS Technologies, Inc.’s Form 10-K for the fiscal year ended June 30, 2016—not a 2015 fourth-quarter filing. The company provides payment processing, financial technology, social-grant distribution, lending and insurance services, principally in South Africa and South Korea, with newer operations in Europe and Hong Kong. Its largest contract is South Africa’s social-grant distribution service for SASSA.
The filing reports U.S. dollars under U.S. GAAP. The South African rand is the primary operating currency, so exchange-rate movements materially affect reported results. The company reported that the U.S. dollar strengthened 26% against the rand and 9% against the Korean won during fiscal 2016.
Key financial metrics
| Metric | FY2016 | FY2015 | Change / context |
|---|---|---|---|
| Revenue | $590.7 million | $626.0 million | Down 6% in dollars; up 19% in rand |
| Operating income | $114.4 million | $128.5 million | Down 11%; operating margin 19%, versus 21% |
| Net income attributable to Net1 | $82.5 million | $94.7 million | Down 13% |
| Diluted EPS | $1.71 | $2.02 | Down 15% |
| Operating cash flow | $116.6 million | $135.3 million | Down 14% in dollars; management cited improved trading activity in rand terms |
| Capital expenditures | $35.8 million | $36.4 million | Primarily Korean processing terminals and South African ATM rollout |
| Cash and cash equivalents | $223.6 million | $117.6 million | Increase mainly reflected $107.7 million raised from IFC Investors |
| Debt | $51.8 million | $59.6 million | June 30 long-term borrowings, including current portion; South Korean facilities |
| Current assets and liabilities, excluding settlement balances | $387.0 million / $65.5 million | $301.9 million / $82.2 million | Settlement assets and obligations are separately reported and equal $536.7 million each at FY2016 year-end |
Quarterly results show FY2016 fourth-quarter revenue of $151.3 million, operating income of $32.2 million and Net1-attributable net income of $24.4 million; diluted EPS was $0.47.
Material changes versus the prior comparable period
- Revenue and earnings declined in reported dollars, mainly because of currency translation. In rand terms, revenue rose 19% and operating income rose 12%.
- South African transaction-processing revenue fell 10% in dollars but rose 13% in rand. International transaction-processing revenue rose 3% in dollars, with acquisitions and KSNET growth contributing; its operating income fell 13% in dollars, partly reflecting higher depreciation and ZAZOO startup costs.
- Financial inclusion and applied technologies revenue fell 9% in dollars but rose 15% in rand. Segment operating income declined 24% in dollars, reflecting rollout and branch costs, Smart Life establishment costs, and a greater mix of lower-margin prepaid airtime.
- Loan-based fees decreased to $47.1 million from $62.2 million. Management cited lower lending demand and fewer customers qualifying amid tougher South African economic conditions.
- The company acquired the remaining interest in Transact24 and acquired Masterpayment, adding international payment operations. It also began equity-method accounting for its approximately 26% Finbond interest after gaining significant influence.
- The company issued approximately 9.98 million shares to IFC Investors for gross proceeds of $107.7 million, repurchased 2.43 million shares for approximately $27.1 million and reported $50.5 million of adverse foreign-currency translation in other comprehensive income.
Outlook, risks and unusual items
- SASSA contract cliff: The current social-grant contract expires March 31, 2017. SASSA stated it intends to assume grant distribution rather than award a replacement tender. CPS represented 21% of FY2016 revenue. The company cannot predict whether it will provide transition services after expiry or the financial effect of any transition.
- Replacement growth: Management is expanding EasyPay Everywhere (EPE), an account and financial-services offering independent of SASSA. It reported more than 1.43 million active EPE accounts as of August 18, 2016, and plans to continue expanding its South African ATM footprint. Success depends on customer adoption, competition and regulatory outcomes.
- Legal and regulatory exposure: The company is litigating SASSA’s interpretation of rules restricting deductions and debit transactions from grant beneficiaries’ accounts. SASSA also challenged a ZAR 317 million payment for additional implementation costs. The National Credit Regulator is seeking cancellation of Moneyline’s credit-provider registration. Outcomes and potential financial effects are uncertain.
- Investigations: The U.S. Department of Justice investigation into possible FCPA and other violations related to the SASSA contract remained ongoing; the SEC had closed its investigation without recommending enforcement. South African Hawks investigations were closed after prosecutors declined to prosecute.
- Acquisition and investment costs: Management expected significant FY2017 implementation costs for Masterpayment’s European financing rollout. It also expected FY2017 capital spending to support South Korean and South African expansion. No numerical earnings or revenue guidance was provided.
- Liquidity and debt: Management said cash and credit facilities were sufficient for at least the next four quarters. On July 29, 2016, the company prepaid KRW 30 billion of South Korean debt, reducing borrowings to approximately $26.0 million at the stated June 30 exchange rate. IFC’s put rights, exercisable on specified events, could affect liquidity and capital resources.
- Other risks and accounting items: Currency volatility, unsecured microloan credit risk, counterparty exposure, competition and South African power and regulatory risks remain material. FY2016 included a $16.3 million increase in the deferred-tax valuation allowance and approximately $6.2 million of tax related to South African subsidiary distributions. Prior-period balance-sheet classifications were restated; the company said the restatement did not affect previously reported income or cash flows. Settlement balances were also presented gross, with no effect on cash and cash equivalents.
Deloitte issued unqualified opinions on the financial statements and internal control over financial reporting. Management concluded disclosure controls and internal controls were effective as of June 30, 2016.
Important facts for investors to verify
- What arrangements, if any, will follow the March 2017 SASSA contract expiry, and how much revenue and operating income must be replaced?
- How are EPE account growth, active usage, lending and insurance economics developing, and can these services scale profitably without SASSA-related distribution revenue?
- What are the outcomes and potential financial consequences of the SASSA debit-order litigation, Corruption Watch challenge and NCR proceeding?
- What is the current status and possible outcome of the DOJ investigation, and how might the IFC put provisions affect liquidity or strategic transactions?
- How do currency movements, acquisition integration costs and Korean fee regulation affect comparable operating performance and cash generation?