LESAKA TECHNOLOGIES INC quarterly report, Q2 FY2019

Business context and reporting period

This is Net 1 UEPS Technologies, Inc.’s unaudited Form 10-Q for the quarter and six months ended December 31, 2018 (fiscal 2019 Q2 and first half). The request identifies Lesaka Technologies Inc.; the filing itself names Net 1 UEPS Technologies, Inc., so confirm the issuer and filing match your intended company.

Net1 provides transaction processing, financial inclusion services and payment technology. Results reflect the expiration of its South African Social Security Agency (SASSA) payment contract on September 30, 2018, and consolidation of DNI from June 30, 2018.

Financial performance and position

For the quarter, South African transaction-processing revenue fell 66%, international transaction-processing revenue fell 14%, and financial inclusion and applied technologies revenue fell 28%. The company recorded a $23.4 million increase in its allowance for doubtful microlending loans in the quarter, primarily tied to SASSA’s migration of EPE customers to SAPO accounts. It also recorded an $8.2 million goodwill impairment and a noncash $15.8 million loss on the fair value of its Cell C investment.

At December 31, 2018, total assets were $1.08 billion, total liabilities $320.0 million, and total equity $652.4 million. Cash and cash equivalents were $69.9 million; an additional $63.1 million was restricted for ATM funding and matched by short-term ATM-funding facilities. Long-term borrowings totaled $35.1 million. The company reported $11.2 million of operating cash flow for the half, while cash and cash equivalents declined from $90.1 million at June 30.

Material changes versus the prior comparable period

• Revenue and operating results deteriorated sharply, principally due to the end of the SASSA contract, reduced EPE account activity and increased credit-loss allowances.
• Net1’s EPE accounts fell as SASSA moved grant recipients to SAPO accounts. The company reported about 1.1 million active accounts around December and January; lending and insurance were also affected by account losses and higher defaults and policy lapses.
• DNI’s consolidation added revenue and operating contribution, but was not enough to offset declines in existing businesses.
• Interest income declined and interest expense rose: first-half interest income, net of impairment, was $1.5 million versus $9.7 million a year earlier; interest expense was $5.5 million versus $4.4 million.
• Foreign-currency translation also weighed on reported results; management said the U.S. dollar strengthened against the rand by 5% year over year in the quarter and 7% in the half.

Outlook, commentary, risks and unusual items

• Management said cash and credit facilities should be sufficient to fund operations for at least the next four quarters. No specific earnings or revenue guidance was provided.
• Net1 had not reached agreement with SASSA on additional fees for services during the contract extension and recognized no additional revenue beyond the original contractual rate. Management said it would recognize any additional amount once an agreement is reached.
• The company warned that continued EPE customer migration could make its South African financial-services business unsustainable. A January 2019 court ruling allowed SASSA to direct grants to SAPO accounts when recipients had not submitted required Annexure C forms; Net1 was considering an appeal.
• CPS was ordered by a High Court to refund ZAR 317.0 million plus interest relating to a 2012 variation agreement. The Supreme Court of Appeal granted leave to appeal; a hearing was expected in the first half of calendar 2019. The outcome is uncertain.
• Cell C’s $149.1 million carrying value is a Level 3 fair-value estimate sensitive to management assumptions, including EBITDA and valuation multiples. Net1 also recorded a $2.7 million impairment on Cedar Cellular notes and expects no cash flows from them before their August 2022 maturity.
• Net1’s disclosure controls and procedures were deemed ineffective at December 31, 2018, because a previously identified material weakness in review of complex, non-routine transactions had not been remediated long enough to assess effectiveness. The weakness had contributed to prior revenue-accounting errors and a restatement related to Cell C.
• Other exposures include $26.8 million of present-value contingent DNI consideration, $6.7 million of guarantees, and potential further goodwill impairment if business performance weakens.

Most important facts for investors to verify

• Confirm the issuer identity: this filing is for Net 1 UEPS Technologies, Inc., not a company named Lesaka Technologies Inc.
• Track EPE account retention, SASSA/SAPO migration, related loan collections and insurance lapses, and the sustainability of the South African business.
• Follow the SASSA fee negotiations and the appeal concerning the ZAR 317.0 million refund order, including any liability recognition or cash impact.
• Assess unrestricted liquidity separately from the $63.1 million restricted ATM cash, and monitor facility maturities, repayments and borrowing costs.
• Review the assumptions supporting the Cell C valuation and the credit-loss allowances, goodwill impairment and Cedar Cellular note impairment.
• Check whether remediation of the material weakness is completed and whether disclosure controls are subsequently assessed as effective.