Net 1 UEPS Technologies, Inc. — Form 10-Q summary
Reporting period: Fiscal third quarter and nine months ended March 31, 2015. The filing identifies the registrant as Net 1 UEPS Technologies, Inc.; this differs from the company name in the request metadata. Financial statements are unaudited. Amounts below are U.S. dollars unless noted.
Business context and financial performance
The company operates in South African and international transaction processing, financial inclusion and applied technologies. Its activities include social-grant payments, payment processing, prepaid airtime, microlending and mobile-payment services. South Africa’s social-grant contract with SASSA is strategically significant.
| Metric | Three months ended March 31, 2015 | Three months ended March 31, 2014 | Nine months ended March 31, 2015 | Nine months ended March 31, 2014 |
|---|---|---|---|---|
| Revenue | $151.1 million | $138.1 million | $461.7 million | $398.9 million |
| Operating income | $32.0 million | $23.9 million | $95.9 million | $59.2 million |
| Operating margin | 21% | 17% | 21% | 15% |
| Net income | $25.0 million | $17.2 million | $72.5 million | $41.5 million |
| Net income attributable to Net1 | $24.4 million | $17.2 million | $70.8 million | $41.5 million |
| Basic / diluted EPS attributable to Net1 | $0.52 / $0.52 | $0.38 / $0.37 | $1.51 / $1.51 | $0.91 / $0.90 |
| Operating cash flow | $49.3 million | $34.6 million | $103.4 million | $5.7 million |
| Capital expenditures | $6.3 million | $4.8 million | $24.8 million | $17.3 million |
Balance sheet, debt and liquidity
- At March 31, 2015, cash and cash equivalents were $111.0 million, up from $58.7 million at June 30, 2014. Total assets were $1.272 billion and total equity was $461.7 million.
- Cash flow was materially affected by settlement activity: settlement assets and matching settlement obligations were each $651.6 million at March 31, 2015. These balances relate mainly to grant and payroll funds held for disbursement and fluctuate with payment timing.
- Long-term borrowings were $60.0 million, down from $62.4 million at June 30, 2014; there was no current portion reported at March 31. The Korean debt carried a 5.22% effective rate at quarter-end. The company made a scheduled $14.1 million repayment during the nine-month period; the next scheduled principal payment was April 2016.
- The company reported an unused South African overdraft facility of ZAR 250 million, while ZAR 137.2 million of its ZAR 150 million indirect and derivative facilities was in use, including for foreign-exchange contracts and guarantees. It also had an unused KRW 10 billion Korean overdraft facility.
- Management stated that cash and credit facilities should fund operations for at least the next four quarters. The company reported no off-balance-sheet arrangements.
Changes versus the prior comparable periods
- For the quarter, revenue increased 9%, operating income 33%, and Net1-attributable income 42%. For the nine months, revenue rose 16%, operating income 62%, and Net1-attributable income 71%.
- Growth reflected higher prepaid-airtime sales, more South African National Payment System transactions, increased UEPS-based lending, more SASSA cardholders paid, and higher KSNET contribution. In reported U.S. dollars, an approximately 8% strengthening of the dollar against the rand during the periods dampened results; revenue in rand increased 18% for the quarter and 25% year to date.
- Cost of goods sold and processing/support costs rose 13% in the quarter and 16% year to date, broadly tracking increased transaction activity and airtime sales. Selling, general and administrative expense fell 6% for the quarter and 3% year to date in U.S. dollars.
- Cash from operations improved substantially year to date from the prior-year $5.7 million, which had been affected by working-capital movements, including receivables. The current-period increase also reflected improved trading activity.
- Other comprehensive loss was $48.8 million for the nine months, principally reflecting foreign-currency translation. Goodwill declined $17.1 million and intangible assets declined $16.8 million from June 30, 2014, with currency translation contributing to the goodwill reduction and amortization reducing intangibles.
Outlook, commentary, risks and unusual items
- SASSA tender: The company was still assessing whether to bid for the new five-year social-grant payment contract. The amended RFP set a May 18, 2015 submission deadline, with an award expected by October 15, 2015. The filing warns that not participating or not winning could cause significant revenue loss; a replacement contract could also have less favorable terms. The company did not provide a quantified estimate of potential impact.
- Contested SASSA payment: Corruption Watch sought review of SASSA’s approval of approximately ZAR 277 million, excluding VAT, paid to the company for additional beneficiary-registration costs. The company said it would oppose the challenge and believed it lacked merit, but could not predict the outcome. A separate U.S. securities lawsuit was also being defended; management considered ordinary-course claims immaterial.
- Lending regulation: South African National Credit Act amendments effective March 13, 2015 require stricter affordability assessments. Management expected a modest effect on UEPS-based lending in the fourth quarter of fiscal 2015.
- Growth initiatives: The company reported approximately 400 operational South African ATMs and said deployment was contributing positively, though capital intensive. ZAZOO announced VCPay collaborations with Uber, Microsoft and Cell C. The World Food Program awarded the company a tender covering 12 Southern African Development Community countries; deployment terms were still being finalized, and management did not expect a meaningful short-term financial contribution.
- Unusual benefit: International transaction-processing results for the quarter included an approximately $1.7 million refund related to industry-wide litigation that had been finalized. This benefited quarterly operating income and segment margin.
- Tax and currency: The nine-month effective tax rate was 30.8%, with non-deductible consulting, legal and interest expenses cited as factors. The company highlighted exposure to rand and won translation changes and uses foreign-exchange contracts to manage certain transaction exposures.
- Spending and accounting: Fourth-quarter capital spending was expected to focus mainly on Korean payment terminals; outstanding capital commitments were $0.4 million. The company expected the new revenue-recognition standard, effective for it beginning fiscal 2018, to have a material impact, but had not completed its assessment.
Important facts for investors to verify
- Whether Net1 participates in the SASSA tender, the final contract terms and award outcome, and the revenue and profitability at risk if it loses or exits the contract.
- The status and potential financial consequences of Corruption Watch’s challenge to the SASSA cost-recovery payment, including any repayment exposure.
- Whether current operating cash generation is sustainable after working-capital movements, taxes, capital expenditures and settlement-related cash flows.
- The extent to which reported earnings growth depends on rand exchange rates, low-margin airtime and transaction volumes, and the one-time $1.7 million litigation-related refund.
- Performance and credit quality of UEPS-based loans under stricter affordability rules, as well as progress and economics of ATM, VCPay and World Food Program deployments.