Net 1 UEPS Technologies, Inc. — FY2014 Form 10-K
Period and business: Fiscal year ended June 30, 2014; the filing was dated August 28, 2014. The request labels the company as Lesaka Technologies and the period as 2013 Q4, but the filing is for Net 1 UEPS Technologies’ FY2014. Net1 provides payment processing, social-grant distribution, mobile and financial-inclusion services, and healthcare transaction technology. Its largest operations are in South Africa, with significant payment processing through KSNET in South Korea.
Financial results
| Metric | FY2014 | FY2013 |
|---|---|---|
| Revenue | $581.7 million | $452.1 million |
| Operating income | $101.8 million | $23.2 million |
| Operating margin | 18% | 5% |
| Net income attributable to Net1 | $70.1 million | $13.0 million |
| Diluted EPS | $1.50 | $0.28 |
| Cash from operating activities | $37.1 million | $55.9 million |
| Cash and cash equivalents, June 30 | $58.7 million | $53.7 million |
| Long-term borrowings, including current portion, June 30 | $77.2 million | $80.8 million |
Revenue increased 29% and Net1-attributable net income rose 440%. Reported growth and profitability were materially affected by the $26.6 million SASSA reimbursement for prior-period implementation costs and the winding down of SASSA implementation expenses. The reimbursement was a one-time item. The rand weakened against the U.S. dollar, which management said reduced reported results; in rand terms, revenue increased 54%.
Operating cash flow declined despite higher earnings, mainly reflecting growth in receivables and finance loans. Capital expenditures were $23.9 million. Reported investing cash outflow was $21.6 million and financing cash outflow was $13.4 million; these cash-flow categories include movements in settlement assets and obligations. Cash held for grant, payroll and other customer settlements is matched by settlement obligations and is not available for general corporate use. The company reported $1.35 billion in total assets and $441.7 million in equity.
At June 30, current borrowings were $14.8 million and long-term borrowings were $62.4 million. The South Korean debt carries floating rates and financial covenants; a $15 billion KRW installment was scheduled for October 2014. Net1 reported that cash and credit facilities were sufficient for at least the next four quarters. Its South African facility provided an overdraft capacity of up to ZAR 250 million, none drawn at year-end, while guarantees and foreign-exchange facilities used ZAR 139 million of the broader facility.
For the quarter ended June 30, 2014, revenue was $182.8 million, operating income $42.6 million and Net1-attributable net income $28.6 million, compared with $117.9 million, $13.6 million and $8.3 million, respectively, in the prior-year quarter.
Business changes and management commentary
- The South African transaction-processing segment reported $261.6 million of revenue and $61.4 million of operating income, reversing its prior-year operating loss. CPS’s social-grant distribution business represented about 27% of FY2014 revenue, versus 42% in FY2013.
- International transaction-processing revenue was $152.7 million; operating income increased to $22.0 million, supported by KSNET growth. The segment continued to incur XeoHealth launch losses, and the NUETS Iraqi contract had expired in FY2013.
- Financial inclusion and applied technologies revenue rose to $207.6 million, mainly from prepaid airtime, higher UEPS-based lending and hardware sales. Segment operating margin fell to 29% from 53%, reflecting lower-margin sales and lending rollout costs.
- The lending portfolio expanded sharply: net finance loans receivable reached $53.1 million from $8.4 million a year earlier. Net1 recorded a $3.1 million allowance for doubtful loans and said the risk profile of the expanded book was still being assessed.
- Net1 sold MediKredit and most of the NUETS business and substantially liquidated Net1 UTA. MediKredit and NUETS disposals generated reported gains of $4.1 million and $2.1 million; UTA liquidation generated a $6.3 million non-cash loss.
- Net1 issued 4.4 million shares to BEE partners and repurchased approximately 2.4 million after a trigger event. The transactions generated an $11.3 million non-cash expense. A further agreement to repurchase a BEE partner’s remaining shares and issue it a minority interest in CPS was signed after year-end.
Outlook, risks and contingencies
The filing gives no numeric revenue or earnings guidance. Management expected FY2015 capital spending to support South African and South Korean operations and stated that available cash and credit should fund at least four quarters. Net1 did not anticipate paying cash dividends in the foreseeable future.
- SASSA contract: The Constitutional Court upheld the invalidity of the tender process but suspended the declaration while SASSA conducts a new tender, or for the remainder of the existing contract if no new award is made. The current contract was due to expire in 2017. Net1’s ability to retain the contract and related cardholder business is uncertain.
- Investigations and litigation: The U.S. DOJ and SEC were investigating possible FCPA, other criminal-law and securities-disclosure violations; the company said it was cooperating and could not predict the outcome or costs. A shareholder class action sought unspecified damages. Net1 also sought approximately ZAR 478 million from AllPay in a separate lawsuit. These matters may affect reputation, business relationships, legal costs and potential liabilities.
- Regulatory and business risks: Smart Life’s South African license remained suspended, preventing new long-term policy issuance pending regulator approval. Net1 also relies on a third-party bank arrangement for grant and wage-payment services and was applying for its own financial-services license.
- Financial and operating risks: Currency movements, South Korean floating-rate debt and covenant compliance, loan defaults, customer and bank counterparty exposure, cash-distribution losses, competition, system security and service interruptions could affect results. About 69% of cash was held by South African subsidiaries and subject to exchange-control constraints.
- Controls and audit: The independent auditor issued an unqualified opinion on the financial statements and internal controls; management reported effective disclosure controls and internal control over financial reporting as of June 30, 2014.
Important facts for investors to verify
- Current status and outcome of the SASSA retender, including timing, award terms and implications for grant distribution revenues and related services.
- Developments, possible penalties and ongoing costs from the DOJ/SEC investigations and related securities litigation.
- Repayment performance, delinquencies and allowance adequacy as the rapidly expanded lending portfolio seasons.
- Cash availability after distinguishing unrestricted corporate cash from settlement funds, and the effect of exchange controls on moving or distributing cash.
- South Korean debt maturities, covenant headroom and sensitivity to floating interest rates.
- Whether reported earnings growth persists without the one-time SASSA reimbursement and as prepaid airtime and hardware sales affect margins.
- Regulatory approval to resume insurance underwriting and the terms and execution of the post-year-end BEE/CPS transaction.