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8-K - CURRENT REPORT - NET 1 UEPS TECHNOLOGIES INCform8k.htm

Exhibit 99.1

Net 1 UEPS Technologies, Inc. Reports First Quarter 2013 Results

  • Performed payments to approximately 9.5 million grant recipients nationally;

  • Revenue of $111.7 million, increased 30% in constant currency; and

  • Fundamental EPS of $0.25 including $15.8 million of direct implementation costs, decreased 32% in constant currency.

JOHANNESBURG, November 8, 2012 – Net 1 UEPS Technologies, Inc. (Nasdaq: UEPS; JSE: NT1) today announced results for the first quarter fiscal 2013.

Summary Financial Metrics

    Three months ended September 30,  
                % change     % change  
    2012     2011     in USD     in ZAR  
(All figures in USD ‘000s except per share data)                        
Revenue   111,682     99,926     12%     30%  
GAAP net income   6,744     19,768     (66% )   (60% )
Fundamental net income (1)   11,498     19,884     (42% )   (33% )
GAAP earnings per share ($)   0.15     0.44     (66% )   (61% )
Fundamental earnings per share ($) (1)   0.25     0.44     (43% )   (33% )
Fully-diluted shares outstanding (‘000’s)   45,590     45,079     1%        
Average period USD/ ZAR exchange rate   8.26     7.09     16%        

(1) Fundamental net income and earnings per share is a non-GAAP measure and is described below under “Use of Non-GAAP Measures—Fundamental net income and fundamental earnings per share.” See Attachment B for a reconciliation of GAAP net income to fundamental net income and earnings per share.

Factors impacting comparability of our Q1 2013 and Q1 2012 results

  • Unfavorable impact from the strengthening of the US dollar: The US dollar appreciated by 16% against the ZAR during Q1 2013 which negatively impacted our reported results;
  • SASSA implementation costs: We continued implementing our SASSA contract during Q1 2013 and incurred additional implementation and staff costs; and
  • Profit on liquidation of SmartSwitch Nigeria: In fiscal 2012, we recorded a non-cash profit of $4.0 million on the liquidation of SmartSwitch Nigeria.

Comments and Outlook

“I am delighted with the progress we have made in the implementation of our SASSA contract and specifically with the efficiency, reliability and security of our platform,” said Dr. Serge Belamant, Chairman and Chief Executive Officer of Net1. “In addition, together with our Board we have now developed an extensive strategic plan that will drive growth and profitability for the group over the next three years. We have identified four key pillars of the strategy, namely (i) South Africa; (ii) NUETS, UEGS and UEPS/EMV; (iii) Mobile Solutions; and (iv) KSNET. We expect to provide more details on this strategy over the next few months,” he concluded.

“We expect our quarterly performance to remain lumpy during the SASSA contract implementation period. In the first quarter of fiscal 2013, we decided to expense the cost of the smart cards issued to grant recipients, rather than to capitalize as under our previous contract,” said Herman Kotzé, Chief Financial Officer of Net1. “Although the estimated number of cards to be issued remains 10 million, the number of beneficiaries that SASSA has now asked us to enroll has increased substantially to 21.6 million, which is approximately 40% higher than SASSA’s previous estimate. Therefore, in fiscal year 2013, we now expect fundamental earnings per share to be at least $1.25, which includes approximately $0.21 per share for the cost of smart cards. Our guidance also assumes a constant currency base of ZAR 7.72/ $1 and using our fiscal 2012 share count of 45 million shares. As a result of expensing the smart cards, we have revised our estimated SASSA-related capital expenditures lower to $35 million,” he concluded.

Progress of second phase of our SASSA contract implementation

     We commenced the second phase of the enrollment process in early July 2012 and plan to be substantially complete by March 2013, in accordance with the enrollment plan agreed with SASSA. Under our agreement with SASSA, we have to enroll both the grant recipients, as well as the grant beneficiaries. While the number of grant recipients on a national basis has consistently been quantified by SASSA at 9.4 million individuals, the number of beneficiaries is continually being revised by SASSA on an ongoing basis from an initial estimate of approximately 15.5 million, to the current estimate of approximately 21.6 million.


     As of September 30, 2012, we had enrolled approximately 1.7 million grant recipients and 1.3 million beneficiaries associated with these recipients in accordance with our second phase enrollment schedule, and issued them our UEPS/EMV smart card.

     During the first quarter of fiscal 2013 we incurred direct implementation expenses of approximately $14.1 million (ZAR 116.6 million) including staff, travel, premises hire for enrollment and stationery costs. In line with industry practice, we no longer amortize the cost of the smart cards over the contract period and expense the cost of the card when issued on enrollment. As a result of our decision to fully expense the UEPS/EMV smart cards when they are issued, we expensed $1.7 million (ZAR 14.0 million) related to the cost of the UEPS/EMV smart cards issued during the quarter, which is not included in the $14.1 million above. We also incurred approximately $3.3 million in capital expenditures, primarily to acquire payment vehicles. Since inception of the implementation we have incurred cumulative capital expenditures of $24.5 million. We anticipate cumulative capital expenditures related to the ramp of our national contract to be in the $35 million range. We have lowered our expected capital expenditure range related to the implementation of our SASSA contract given the decision to expense the cost of smart cards rather than capitalize those costs.

Results of Operations by Segment and Liquidity

Our frequently asked questions and operating metrics will be updated and posted on our website (www.net1.com).

           South African transaction-based activities

Segment revenue was $61.4 million in Q1 2013, up 23% compared with Q1 2012 in USD and up 43% on a constant currency basis. In ZAR, the increases in segment revenue were primarily due to higher revenues earned under our new SASSA contract and higher prepaid airtime sales, offset by lower volumes at EasyPay and MediKredit. Segment operating income margin was 10% and 40%, respectively, and declined primarily due to SASSA implementation costs and higher low-margin prepaid airtime sales. Excluding amortization of acquisition-related intangibles, Q1 2013 segment operating income margin was 13%, compared to 43% during Q1 2012.

           International transaction-based activities

KSNET continues to contribute the majority of our revenues in this operating segment. Segment revenue was $31.6 million in Q1 2013, up 5% compared with Q1 2012 in USD and 22% on a constant currency basis. Operating margin for the segment is lower than most of our South African transaction-based businesses and was negatively impacted by adverse currency movement between the Korean won and the US dollar, additional start-up expenditures related to our XeoHealth launch in the United States, MVC activities at Net1 UTA and on-going losses at Net1 Virtual Card, but these expenses were partially offset by increased revenue contributions from KSNET and NUETS’ initiative in Iraq. Excluding the amortization of intangibles but including the start-up costs referenced above, Q1 2013 operating income margin was 9% compared to 13% during Q1 2012.

           Smart card accounts

Segment revenue was $8.4 million in Q1 2013, up 1% compared with Q1 2012 in USD and 18% on a constant currency basis. Q1 2013 segment operating income margin was 29%, compared to 45% during Q1 2012. We have reduced our pricing for smart card accounts after taking into consideration the lower price and higher volumes of the new SASSA contract.

           Financial services

UEPS-based lending contributes the majority of the revenue and operating income in this operating segment. Segment revenue was $1.4 million in Q1 2013, down 34% compared with Q1 2012 in USD and 22% lower on a constant currency basis, principally due to a decrease in lending activities. Q1 2013 segment operating income margin was 79% compared with 67% during Q1 2012 primarily as a result of an improved margin in our UEPS-based lending book resulting from a better loss experience, offset by start-up expenditures related to Smart Life and other financial services offerings.

           Hardware, software and related technology sales

Segment revenue was $8.9 million in Q1 2013, down 5% compared with Q1 2012 in USD but up 10% on a constant currency basis. In constant currency, the increase in revenue and operating income resulted primarily from an increase in royalty fees, offset by a lower contribution from all other contributors to hardware and software sales. Excluding amortization of all intangibles, segment operating income margin was 22% compared to 21% during Q1 2012.

           Cash flow and liquidity

At September 30, 2012, we had cash and cash equivalents of $58 million, up from $39 million at June 30, 2012. The increase in our cash balances from June 30, 2012, was primarily from cash generated from operations, offset by implementation costs and capital expenditures incurred to implement our SASSA contract and the cash portion of the purchase price of the acquisition of Pbel, a software development firm focused on mobile phones and kiosks, for $1.9 million. For Q1 2013, net cash generated by operating activities was $25.7 million compared with $27.2 million in Q1 2012.


Excluding the impact of interest received, interest paid under our Korean debt and taxes paid, the decrease in cash provided by operating activities resulted from significant implementation costs related to our SASSA contract, partially offset by cash generated from operations. Capital expenditures for Q1 2013 and 2012 were $6.5 million and $4.5 million, respectively, and have increased primarily due to acquisition of payment vehicles and other equipment for our new SASSA contract and payment processing terminals in Korea.

Use of Non-GAAP Measures

US securities laws require that when we publish any non-GAAP measures, we disclose the reason for using the non-GAAP measure and provide reconciliation to the directly comparable GAAP measure. The presentation of fundamental net income and fundamental earnings per share and headline earnings per share are non-GAAP measures.

           Fundamental net income and fundamental earnings per share

Fundamental net income and earnings per share is GAAP net income and earnings per share to adjusted for (1) the amortization of acquisition-related intangible assets (net of deferred taxes), (2) stock-based compensation charges and (3) unusual non-recurring items, including the amortization of KSNET debt facility fees, transaction-related costs and the profit on liquidation of SmartSwitch Nigeria. Management believes that the fundamental net income and earnings per share metric enhances its own evaluation, as well as an investor’s understanding, of our financial performance. Attachment B presents the reconciliation between GAAP and fundamental net income and earnings per share.

           Headline earnings per share (“HEPS”)

The inclusion of HEPS in this press release is a requirement of our listing on the JSE. HEPS basic and diluted is calculated using net income which has been determined based on GAAP. Accordingly, this may differ to the headline earnings per share calculation of other companies listed on the JSE as these companies may report their financial results under a different financial reporting framework, including but not limited to, International Financial Reporting Standards.

HEPS basic and diluted is calculated as GAAP net income adjusted for the profit on sale of property, plant and equipment, net of related tax effects, and the profit on liquidation of SmartSwitch Nigeria. Attachment C presents the reconciliation between our net income used to calculate earnings per share basic and diluted and HEPS basic and diluted.

Conference Call

We will host a conference call to review Q1 2013 results on November 9, 2012, at 8:00 Eastern Time. To participate in the call, dial 1-800-860-2442 (U.S. only), 1-866-605-3852 (Canada only), 0-800-917-7042 (U.K. only) or 0-800-200-648 (South Africa only) ten minutes prior to the start of the call. Callers should request “Net1 call” upon dial-in. The call will also be webcast on our homepage, www.net1.com. Please click on the webcast link at least ten minutes prior to the call. A webcast of the call will be available for replay on our website through November 30, 2012.

About Net1 (www.net1.com)

Net1 is a leading provider of alternative payment systems that leverage its Universal Electronic Payment System, or UEPS, to facilitate biometrically secure real-time electronic transaction processing to unbanked and under-banked populations of developing economies around the world in an online or offline environment. In addition to payments, UEPS can be used for banking, healthcare management, payroll, remittances, voting and identification.

Net1 operates market-leading payment processors in South Africa, Republic of Korea, Ghana and Iraq. In addition, Net1’s proprietary Mobile Virtual Card technology offers secure mobile payments and banking services in developed and emerging countries while its MediKredit and XeoHealth subsidiaries provide its proprietary 5010 and ICD-10 compliant real-time claims adjudication system.

Net1 has a primary listing on the Nasdaq and a secondary listing on the JSE Limited.

Forward-Looking Statements

This announcement contains forward-looking statements that involve known and unknown risks and uncertainties. A discussion of various factors that cause our actual results, levels of activity, performance or achievements to differ materially from those expressed in such forward-looking statements are included in our filings with the Securities and Exchange Commission. We undertake no obligation to revise any of these statements to reflect future events.

Investor Relations Contact:
Dhruv Chopra
Vice President of Investor Relations
Phone: +1-212-626-6675
Email: dchopra@net1.com


NET 1 UEPS TECHNOLOGIES, INC.
Unaudited Condensed Consolidated Statements of Operations

    Three months ended  
    September 30,  
    2012     2011  
    (In thousands, except per share data)  
REVENUE $  111,682   $  99,926  
             
EXPENSE            
             
         Cost of goods sold, IT processing, servicing and support   45,101     32,944  
         Selling, general and administration   47,252     27,057  
         Depreciation and amortization   10,004     9,079  
             
OPERATING INCOME   9,325     30,846  
             
INTEREST INCOME   3,091     1,997  
             
INTEREST EXPENSE   2,071     2,616  
             
INCOME BEFORE INCOME TAXES   10,345     30,227  
             
INCOME TAX EXPENSE   3,729     10,552  
             
NET INCOME BEFORE EARNINGS FROM EQUITY- ACCOUNTED INVESTMENTS   6,616     19,675  
             
EARNINGS FROM EQUITY-ACCOUNTED INVESTMENTS   128     85  
             
NET INCOME   6,744     19,760  
             
LESS (ADD) NET INCOME (LOSS) ATTRIBUTABLE TO            
             
NON-CONTROLLING INTEREST   -     (8 )
             
NET INCOME ATTRIBUTABLE TO NET1 $  6,744   $  19,768  
             
Net income per share, in United States dollars            
         Basic earnings attributable to Net1 shareholders $ 0.15   $ 0.44  
         Diluted earnings attributable to Net1 shareholders $ 0.15   $ 0.44  


NET 1 UEPS TECHNOLOGIES, INC.
Condensed Consolidated Balance Sheets

    Unaudited     (A)  
    September 30,     June 30,  
    2012     2012  
    (In thousands, except share data)  
ASSETS    
CURRENT ASSETS            
     Cash and cash equivalents $  57,544   $  39,123  
     Pre-funded social welfare grants receivable   8,971     9,684  
     Accounts receivable, net of allowances of – September: $955; June: $788   99,703     101,918  
     Finance loans receivable   6,787     8,141  
     Deferred expenditure on smart cards   4,604     4,587  
     Inventory   7,129     6,192  
     Deferred income taxes   6,223     5,591  
             Total current assets before settlement assets   190,961     175,236  
                     Settlement assets   347,672     409,166  
                             Total current assets   538,633     584,402  
PROPERTY, PLANT AND EQUIPMENT, NET OF ACCUMULATED
DEPRECIATION OF – September: $80,058; June: $74,242
 
54,475
   
52,616
 
EQUITY-ACCOUNTED INVESTMENTS   1,571     1,508  
GOODWILL   187,570     182,737  
INTANGIBLE ASSETS, net   93,327     93,930  
OTHER LONG-TERM ASSETS, including reinsurance assets   40,570     40,700  
     TOTAL ASSETS   916,146     955,893  
LIABILITIES    
CURRENT LIABILITIES            
     Accounts payable   14,722     13,172  
     Other payables   40,209     42,157  
     Current portion of long-term borrowings   14,438     14,019  
     Income taxes payable   11,542     6,019  
             Total current liabilities before settlement obligations   80,911     75,367  
                    Settlement obligations   347,672     409,166  
                             Total current liabilities   428,583     484,533  
DEFERRED INCOME TAXES   21,065     20,988  
LONG-TERM BORROWINGS   82,145     79,760  
OTHER LONG-TERM LIABILITIES, including insurance policy liabilities   25,998     25,791  
     TOTAL LIABILITIES   557,791     611,072  
COMMITMENTS AND CONTINGENCIES            
EQUITY    
NET1 EQUITY:            
     COMMON STOCK
                Authorized: 200,000,000 with $0.001 par value;
                Issued and outstanding shares, net of treasury - September: 45,600,471;
                June: 45,548,902
 


59
   


59
 
     PREFERRED STOCK
               Authorized shares: 50,000,000 with $0.001 par value;
                Issued and outstanding shares, net of treasury: 2012: -; 2011: -
 

-
   

-
 
     ADDITIONAL PAID-IN-CAPITAL   155,895     153,360  
     TREASURY SHARES, AT COST: September: 13,455,090; June: 13,455,090   (175,823 )   (175,823 )
     ACCUMULATED OTHER COMPREHENSIVE LOSS   (71,467 )   (75,722 )
     RETAINED EARNINGS   446,385     439,641  
             TOTAL NET1 EQUITY   355,049     341,515  
             NON-CONTROLLING INTEREST   3,306     3,306  
                     TOTAL EQUITY   358,355     344,821  
                             TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $  916,146   $  955,893  
(A) – Derived from audited financial statements            


NET 1 UEPS TECHNOLOGIES, INC.
Unaudited Condensed Consolidated Statements of Cash Flows

    Three months ended  
    September 30,  
    2012     2011  
    (In thousands)  
Cash flows from operating activities            
Net income $  6,744   $  19,760  
Depreciation and amortization   10,004     9,079  
Loss from equity-accounted investments   (128 )   (85 )
Fair value adjustments   (293 )   (221 )
Interest payable   1,192     1,662  
Profit on disposal of property, plant and equipment   -     (8 )
Profit on liquidation of SmartSwitch Nigeria   -     (3,994 )
Realized loss on sale of investments related to insurance business   -     25  
Stock-based compensation charge   1,116     496  
Facility fee amortized   88     116  
Decrease in accounts receivable, pre-funded social welfare grants receivable and finance loans receivable   5,892     3,248  
(Increase) Decrease in deferred expenditure on smart cards   (33 )   44  
Increase in inventory   (926 )   (319 )
(Decrease ) Increase in accounts payable and other payables   (1,349 )   331  
Increase (Decrease) in taxes payable   5,438     (3,607 )
Increase (Decrease) in deferred taxes   (2,016 )   692  
   Net cash provided by operating activities   25,729     27,219  
Cash flows from investing activities            
Capital expenditures   (6,453 )   (4,466 )
Proceeds from disposal of property, plant and equipment   105     94  
Acquisition of Pbel, net of cash acquired   (1,913 )   -  
Acquisition of Smart Life, net of cash acquired   -     (1,673 )
Repayment of loan by equity-accounted investment   3     33  
Purchase of investments related to insurance business   -     (2,320 )
Proceeds from maturity of investments related to insurance business   545     2,321  
Net change in settlement assets   60,779     3,447  
   Net cash provided by (used in) investing activities   53,066     (2,564 )
Cash flows from financing activities            
Proceeds from issue of common stock   240     -  
Acquisition of treasury stock   -     (1,129 )
Net change in settlement obligations   (60,779 )   (3,447 )
Net cash used in financing activities   (60,539 )   (4,576 )
Effect of exchange rate changes on cash   165     (13,360 )
             
Net increase in cash and cash equivalents   18,421     6,719  
Cash and cash equivalents – beginning of period   39,123     95,264  
Cash and cash equivalents – end of period $  57,544   $  101,983  


Net 1 UEPS Technologies, Inc.

Attachment A

Operating segment revenue, operating income and operating margin:

Three months ended September 30, 2012 and 2011 and June 30, 2012

                                  Change – constant  
                      Change - actual     exchange rate(1)
                      Q1 ‘13     Q1 ‘13     Q1 ‘13     Q1 ‘13  
                      vs     vs     vs     vs  
Key segmental data, in $ ’000,   Q1 ‘13     Q1 ‘12     Q4 ‘12     Q1‘12     Q4 ‘12     Q1 ‘12     Q4 ‘12  
   Revenue:                                          
       SA transaction-based activities   61,364     49,902     58,434     23%     5%     43%     8%  
      International transaction-based activities   31,649     30,255     31,003     5%     2%     22%     5%  
       Smart card accounts   8,364     8,252     8,189     1%     2%     18%     5%  
       Financial services   1,384     2,111     1,777     (34% )   (22% )   (24% )   (20% )
       Hardware, software and related technology sales   8,921     9,406     8,213     (5% )   9%     10%     12%  
             Total consolidated revenue   111,682     99,926     107,616     12%     4%     30%     7%  
                                           
   Consolidated operating (loss) income:                                          
       SA transaction-based activities   6,400     20,183     5,181     (68% )   24%     (63% )   27%  
            Operating income excluding amortization   7,849     21,589     6,809     (64% )   15%     (58% )   19%  
             Amortization of intangible assets   (1,449 )   (1,406 )   (1,628 )   3%     (11% )   20%     (8% )
       International transaction-based activities   (171 )   684     137     nm     nm     nm     nm  
            Operating income excluding amortization   2,981     3,991     3,130     (25% )   (5% )   (13% )   (2% )
             Amortization of intangible assets   (3,152 )   (3,307 )   (2,993 )   (5% )   5%     11%     8%  
       Smart card accounts   2,385     3,750     2,333     (36% )   2%     (26% )   5%  
       Financial services   1,097     1,411     951     (22% )   15%     (9% )   19%  
       Hardware, software and related technology sales   1,984     1,937     2,074     2%     (4% )   19%     (2% )
            Operating income excluding amortization   2,072     2,038     2,164     2%     (4% )   18%     (2% )
             Amortization of intangible assets   (88 )   (101 )   (90 )   (13% )   (2% )   1%     1%  
       Corporate/ Eliminations   (2,370 )   2,881     (13,078 )   nm     (82% )   nm     (81% )
             Total operating income   9,325     30,846     (2,402 )   (70% )   nm     (65% )   nm  
                                           
   Operating income margin (%)                                          
       SA transaction-based activities   10%     40%     9%                          
       International transaction-based activities   (1% )   2%     0%                  
       International transaction-based activities excluding amortization   9%     13%     10%                  
       Smart card accounts   29%     45%     28%                          
       Financial services   79%     67%     54%                          
       Hardware, software and related technology sales   22%     21%     25%                  
       Overall operating margin   8%     31%     (2% )                        

(1) – This information shows what the change in these items would have been if the USD/ ZAR exchange rate that prevailed during 1Q 2013 also prevailed during 1Q 2012 and 4Q 2012.


Net 1 UEPS Technologies, Inc.

Attachment B

Reconciliation of GAAP net income and earnings per share, basic, to fundamental net income and earnings per share, basic:

Three months ended September 30, 2012 and 2011

                                        EPS,  
    Net income     EPS, basic     Net income     basic  
    (USD’000)     (USD)     (ZAR’000)     (ZAR)  
    2012     2011     2012     2011     2012     2011     2012     2011  
                                                 
GAAP   6,744     19,768     0.15     0.44     55,709     140,232     1.22     3.11  
                                                 
     Intangible asset amortization, net   3,501     3,498                 28,917     24,816              
     Stock-based compensation charge   1,116     496                 9,219     3,519              
     Facility fees for KSNET debt   89     116                 735     823              
     Acquisition-related costs   48     -                 396     -              
     Profit on liquidation of                                                
     SmartSwitch Nigeria   -     (3,994 )               -     (28,333 )            
Fundamental   11,498     19,884     0.25     0.44     94,976     141,057     2.09     3.13  

Net 1 UEPS Technologies, Inc.

Attachment C

Reconciliation of net income used to calculate earnings per share basic and diluted and headline earnings per share basic and diluted:

Three months ended September 30, 2012 and 2011

    2012     2011  
             
Net income (USD’000)   6,744     19,768  
Adjustments:            
     Profit on liquidation of SmartSwitch Nigeria (USD’000)   -     (3,994 )
     Profit on sale of property, plant and equipment   -     (8 )
     Tax effects on above   -     3  
             
Net income used to calculate headline earnings (USD’000)   6,744     15,769  
             
Weighted average number of shares used to calculate net income per share basic earnings and headline earnings per share basic earnings (‘000)   45,515     45,055  
             
Weighted average number of shares used to calculate net income per share diluted earnings and headline earnings per share diluted earnings (‘000)   45,590     45,085  
             
Headline earnings per share:            
     Basic, in USD   0.15     0.35  
     Diluted, in USD   0.15     0.35