Business context and reporting period
The filing is a Form 10-Q for Net 1 UEPS Technologies, Inc. for the quarter ended December 31, 2016 (fiscal 2017 second quarter), with six-month comparisons to December 31, 2015. The filing entity is Net 1 UEPS Technologies, Inc., not Lesaka Technologies Inc. The company reports South African transaction processing, international transaction processing, and financial inclusion and applied technologies.
Key financial results
Amounts below are U.S. dollars in millions, except per-share data. Comparisons are with the corresponding prior-year period.
| Metric | Three months | Six months |
|---|---|---|
| Revenue | $151.4; +1% | $307.1; +1% |
| Operating income | $25.6; +3% | $57.8; +3% |
| Operating margin | 16.9%, versus 16.5% | 18.8%, versus 18.4% |
| Net income attributable to Net1 | $18.6; +12% | $43.3; +9% |
| Basic and diluted EPS | $0.35; unchanged | $0.81, versus $0.84 |
| Cash from operating activities | $15.7, versus $4.0 | $69.6, versus $32.1 |
| Capital expenditures | $3.1, versus $9.9 | $6.5, versus $20.6 |
Quarterly cost of goods sold and servicing costs fell 7%, while selling, general and administrative expense rose 15%. For the six months, those expenses changed by -5% and +11%, respectively. Management reported higher underlying revenue and operating income in South African rand for the first half, while U.S.-dollar results were affected by currency translation.
Balance sheet and liquidity
At December 31, cash, cash equivalents and restricted cash were $198.9 million, down from $223.6 million at June 30, 2016. The December balance included $43.7 million restricted in escrow for a bank guarantee. Reported borrowings totaled approximately $23.2 million; no South African or Korean overdraft was drawn. Total assets were $1.04 billion and total liabilities were $426.0 million. Settlement assets and obligations were each $333.2 million and are subject to timing-related swings. Management said available cash and credit facilities were sufficient for at least the next four quarters.
Six-month investing cash flow was a net inflow of $185.2 million, largely reflecting the net change in settlement assets; this is not a measure of cash generated by core operations. Financing cash outflow was $282.9 million, including $32.1 million of share repurchases and $28.5 million of Korean debt repayments. Cash declined by $24.8 million over the six months.
Material changes and management commentary
- South African transaction processing revenue rose 8% for the half in U.S. dollars, supported by EasyPay Everywhere (EPE), ATM usage and grant-payment activity. The segment’s operating margin improved to 25% from 24%.
- International transaction processing revenue increased 10%, including contributions from T24 and Masterpayment, but operating income declined 10%. South Korean card-fee regulation pressured KSNET; Masterpayment expansion costs and ZAZOO start-up costs also weighed on results.
- Financial inclusion and applied technologies revenue decreased 8% for the half. Management attributed this primarily to lower prepaid sales after introducing biometric security and fewer terminal sales, partly offset by growth in lending and insurance. Segment operating margin improved to 24% from 23%.
- Quarterly and six-month results included an approximately $0.8 million refund relating to South Korean industry litigation, which management said was closed with no further refunds expected. A $1.8 million reversal of previously recorded stock compensation contributed to a net $0.7 million stock-compensation reversal for the six months.
- Cash use reflected share repurchases, Korean debt prepayments, taxes, acquisitions, a $15.3 million investment in MobiKwik, a $10.0 million loan to Finbond and capital expenditures. The company repurchased 3.14 million shares for approximately $31.6 million during the half.
Outlook, risks and contingencies
- SASSA contract: The social-grant services contract was due to expire March 31, 2017. SASSA said it would not be ready to assume the payment function on April 1 and sought discussions on an interim arrangement. The company expressed willingness to meet, but stated that an extension or transition arrangement, its legal basis, terms and outcome were uncertain.
- Blue Label investment: Net1 SA agreed to purchase approximately 117.9 million Blue Label shares for ZAR 2.0 billion (about $145.6 million). The subscription date was deferred to a date between January 23 and February 28, 2017; a bank guarantee was extended to February 28. The company expected to fund the purchase with cash and a portion of an RMB facility of up to ZAR 1.4 billion. This is a significant near-term funding and execution commitment.
- Equity issuance: Agreements to sell 5.0 million Net1 shares at $9 per share for $45.0 million in aggregate were scheduled to close between January 23 and February 28, 2017. The shares would be subject to a six-month resale restriction.
- Bank Frick: A January 2017 agreement to acquire a 30% interest in the Liechtenstein bank was subject to regulatory approval. Net1 would have a two-year option to acquire a further 35%; the filing did not provide the purchase price. The parties also planned approximately $30 million of bank equity as seed capital for a fund dedicated to Net1 activities.
- Other risks include South African rand and Korean won exchange-rate movements, changes in South Korean transaction-fee rules, credit performance in unsecured microlending, and the possibility that improved prepaid-product security may continue to affect transaction volumes while customers adopt it. Management expected the biometric feature’s adverse sales impact to ease over time.
- The company expected third-quarter capital spending mainly for Korean payment terminals and expansion of South African ATMs and branches. It reported $0.1 million of capital commitments at December 31, 2016. Ordinary-course claims were described as not expected to have a material adverse effect; guarantees to Nedbank could expose the company to up to $9.5 million.
Most important facts for investors to verify
- The SASSA contract’s status, any court proceedings, and the terms and economics of any extension or transition arrangement.
- Whether the Blue Label share purchase and the $45.0 million share issuance closed as planned, and the resulting cash, debt and dilution effects.
- Availability, drawdown and covenant terms of the RMB financing, including the escrow release and guarantee timeline.
- Whether EPE, lending and insurance growth can offset prepaid-sales pressure and South Korean fee regulation, and the performance of newer acquisitions and investments.
- The sustainability of operating cash flow, given settlement timing, taxes, planned investment spending and foreign-exchange exposure.