SEC filing summary
Entity note: The supplied filing is for Net 1 UEPS Technologies, Inc. (NASDAQ: UEPS), not Lesaka Technologies Inc. The period covered is the three months ended September 30, 2020, the company’s first quarter of fiscal 2021. Financial statements are unaudited; amounts below are U.S. dollars unless stated otherwise.
Business context and reporting period
Net1 reported three segments: Processing, Financial services and Technology, operating mainly in South Africa. The company said it was focusing primarily on South Africa and exiting its IPG operations; it revised its segment structure and restated prior-period segment information. Net1 Korea and DNI were classified as discontinued operations following earlier disposals.
Key financial metrics
| Metric | Q1 FY2021 | Prior comparable quarter |
|---|---|---|
| Revenue | $37.1 million | $47.9 million |
| Operating loss | $10.8 million | $6.4 million |
| Operating loss margin | 29.0% | 13.4% |
| Net loss | $29.0 million | $4.4 million |
| Basic and diluted loss per share | $0.51 | $0.08 |
| Cash used in operating activities | $29.9 million | $18.3 million |
| Cash provided by investing activities | $24.2 million | Cash used: $12.9 million |
| Cash used in financing activities | $11.7 million | Cash provided: $27.0 million |
Revenue fell 23% in U.S. dollars and 12% in South African rand. Management attributed the decline mainly to lower prepaid airtime sales and account-fee revenue, partly offset by higher transaction fees. The U.S. dollar was 14% stronger against the rand year over year, further reducing reported U.S.-dollar results. The filing reports no consolidated gross margin.
The $29.0 million net loss included a $16.8 million impairment of the Finbond investment. Equity-accounted investments recorded a net loss of $19.1 million, compared with $1.1 million of earnings in the prior-year quarter. The prior period also included $2.9 million of income from discontinued operations.
At September 30, cash and cash equivalents were $209.2 million; restricted ATM funding cash was $6.7 million. Total current assets were $286.8 million and current liabilities were $44.4 million, including matching settlement assets and obligations of about $4.0 million. Total liabilities were $49.7 million. ATM-related short-term credit facilities utilized were $6.7 million; the filing reports no long-term borrowings utilized. Operating lease liabilities totaled $5.0 million. Cash, cash equivalents and restricted cash at quarter-end were $215.9 million.
Material changes versus the prior comparable period
- Processing revenue declined 18% in U.S. dollars; the segment’s operating loss widened to $7.3 million from $5.5 million. IPG recorded a $2.8 million operating loss and was being wound down.
- Financial services revenue fell 42% to $8.3 million, primarily from lower account fees. The segment moved from $0.3 million operating income to a $2.4 million operating loss; management also cited higher employee costs and insurance claims.
- Technology revenue declined 14% to $6.2 million, while operating income increased to $1.8 million, reflecting improved hardware margins.
- Operating cash outflow increased, reflecting cash losses in continuing operations, growth in the lending book, and $15.4 million of income taxes paid, primarily in the U.S. Investing cash inflow included $20.1 million received after a refund of South Korean taxes withheld in connection with the Net1 Korea sale.
Outlook, management commentary, risks and unusual items
- Outlook and liquidity: Management said cash reserves and credit facilities were sufficient to support the next 12 months and fund the ATM network. It expected no significant additional pandemic-related liquidity effects unless stricter South African restrictions returned. No quantified earnings or revenue guidance was provided.
- COVID-19: South African operations ran largely normally during the quarter, and management reported normal loan origination and no deterioration in collections. Insurance benefit claims were higher, though the pandemic’s contribution was unclear. Future effects remained uncertain.
- Investments: Net1 recorded a $16.8 million Finbond impairment after losses, slower lending activity and a substantial share-price decline. Cell C remained valued at zero; it was in default on lending arrangements and pursuing recapitalization. Bank Frick performed better than expected, while management described recovery at Carbon and MobiKwik as developing.
- Strategy and leadership: Net1 was transitioning South African financial services toward a consumer-focused model and planning to expand business processing for small and micro enterprises. The former CEO departed September 30; an interim CEO took over October 1 while the board sought a permanent successor. IPG closure was expected to be largely complete from a cost perspective by the end of Q2 FY2021.
- Contingencies and subsequent events: Guarantees issued for third parties had a maximum potential payment of $5.6 million and reduced available credit capacity. On October 16, 2020, the South African High Court ordered CPS into liquidation; Net1 said it would not appeal. On October 15, Net1 purchased former CPS mobile-ATM vehicles for approximately $3.0 million, which management expected to increase Q2 capital spending.
- Controls: Management concluded disclosure controls were not effective at September 30, 2020, because there had been insufficient time to assess remediation of a material weakness disclosed in the prior annual report. The company said it continued manual mitigating procedures.
Most important facts for investors to verify
- Confirm the issuer and ticker: this filing identifies Net 1 UEPS Technologies, Inc. (UEPS), rather than Lesaka Technologies Inc.
- Review the basis and sensitivity of the Finbond impairment and monitor further changes in the carrying value of equity-accounted investments, particularly Cell C.
- Track revenue, account-holder activity, segment operating losses and progress in closing IPG, including whether the stated South African strategy improves results.
- Reconcile liquidity and cash burn, including tax payments, ATM facility use, restricted cash and the expected vehicle-purchase spending.
- Monitor COVID-19 effects on South African activity, microlending collections and insurance claims, as well as currency movements.
- Review remediation of the material weakness and the CPS liquidation’s potential effects on assets, operations and legal or commercial obligations.