JOHANNESBURG, SOUTH AFRICA — (Marketwired) — 05/09/13 — Net 1 UEPS Technologies, Inc. (NASDAQ: UEPS)(JSE: NT1) today announced results for the third quarter fiscal 2013.
Factors impacting comparability of our Q3 2013 and Q3 2012 results
Comments and Outlook
“We are very pleased with the commitment demonstrated by the Net1 team to complete bulk enrollment for our SASSA implementation on schedule despite having to register nearly 40% more beneficiaries than originally planned,” said Dr. Serge Belamant, Chairman and Chief Executive Officer of Net1. “By April 30, 2013, we had registered over 20 million beneficiaries and issued more than 9.1 million cards. We are also delighted that a full bench of the Supreme Court of Appeal unanimously ruled in favor of Net1 and SASSA. We can now focus exclusively on providing best-in-class service to SASSA and the citizens of South Africa. Meanwhile, we continue to cooperate with the DOJ and SEC on their investigations, but as a result of these investigations, we continue to experience some adverse impact from the damage caused to our reputation, including our ability to execute certain aspects of our strategic plan,” he concluded.
“The successful implementation for SASSA is a one-off event and integral for the smooth transition and operation of South Africa-s social welfare program. Given the critical importance of this roll out, and the higher number of beneficiaries required to be enrolled in the same time frame, our implementation costs have been materially but proportionally higher than anticipated,” said Herman Kotze, Chief Financial Officer of Net1. “In the fourth quarter of fiscal 2013, we expect fundamental earnings per share of at least $0.20, which includes approximately $7 – $9 million of further implementation and smart card costs, and also assumes a constant currency base of ZAR 7.72/$1 and a share count of approximately 45 million shares,” 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 substantially completed bulk enrollment by March 31, 2013, in accordance with the implementation plan agreed with SASSA. Under our agreement with SASSA, we have to enroll both the grant recipients as well as their dependents. While the number of grant recipients on a national basis has consistently been quantified by SASSA at approximately 9.4 million individuals, the number of beneficiaries was revised higher by SASSA from an initial estimate of approximately 15.5 million, to the current estimate of approximately 21.6 million. In order to complete the second phase of the implementation on time, and given the significantly higher number of beneficiaries, we increased the number of temporary employees that we hired in the second quarter of fiscal 2013 from 2,500 to approximately 5,500 and retained the higher employee base through all of the third quarter of fiscal 2013. Our temporary employee headcount has since declined to approximately 3,000 at April 30, 2013. During the third quarter of fiscal 2013, we enrolled a further 5.8 million grant recipients and an additional 6.7 million beneficiaries, for a total of 12.5 million citizens.
During the third quarter of fiscal 2013, we incurred direct implementation expenses of approximately $16.1 million (ZAR 140.5 million), including staff, travel, temporary infrastructure hire, fixed premises hire for enrollment and stationery costs. We are unable to quantify the value of time spent by our executives and pension and welfare operations managers and staff that service the five provinces in which we operated under the previous contract and that have assisted in the implementation of the national contract. We also expensed $4.5 million (ZAR 39.3 million) related to the cost of the UEPS/EMV smart cards issued during the quarter, which is not included in the $16.1 million (ZAR 140.5 million) of direct implementation expenses described above.
We also incurred approximately $1.4 million in capital expenditures related to the implementation during the third quarter of fiscal 2013. Since inception of the implementation we have incurred cumulative capital expenditures of $26.6 million. We do not expect any further significant capital expenditures related to this implementation and expect our cumulative capital expenditure to remain below our prior estimate of $30 million.
During March 2013, the Minister of Social Development and SASSA announced that the deadline for the enrollment of grant recipients would be extended to April 30, 2013. We therefore continued with the enrollment process for the month of April 2013 and expect no further extensions to be granted by the Minister and SASSA. Those beneficiaries who have not presented themselves for enrollment at the end of April 2013 will receive grant cancellation notices. This may result in the final total number of enrolled grant recipients and cardholders being less than the numbers provided in the original database.
Our total cash outlay through March 31, 2013 has been $96 million for direct implementation expenses, smart card costs and capital expenditures. We would have been in-line with the mid-point of our initial total cash outlay range assuming the volume of enrollments had not changed. Having to register the incremental beneficiaries and therefore employ our temporary staff for longer, should result in our total cash outlay for the implementation being between $100 and $105 million.
Update on Government Investigations, SASSA Tender Award Litigation and Suit Against AllPay
Government investigations
We are continuing to cooperate with the investigations being conducted by the DOJ and SEC that we have previously disclosed. We have produced documents and information to the DOJ and the SEC relating to their investigations and expect to continue to produce documents over the coming months. We also expect that the DOJ and the SEC will conduct interviews of some of our personnel as part of their investigations. See also Part II, Item 1A-“Risk Factors.”
In addition, on February 14, 2013, we filed an application pursuant to Section 34 of the South African Prevention of Corrupt Activities Act in South Africa with the South African Police Service. Section 34 deals with the reporting of suspected fraud, theft, extortion and forgery. Matters reported under Section 34 are usually referred for investigation to the South African Directorate for Priority Crime Investigation, known as the Hawks. We filed the Section 34 application to prompt the Hawks to conduct an investigation into who may have made corruption allegations that appeared in the South African media after we were awarded the SASSA tender in January 2012. The Hawks have confirmed to us that our Section 34 application has been accepted for investigation. We have provided certain electronic information to the Hawks at their request and we will cooperate with the Hawks in their investigation.
SASSA tender award litigation
On March 27, 2013, a full bench of the South African Supreme Court of Appeal dismissed the appeal by AllPay Consolidated Investment Holdings (Pty) Ltd (“AllPay”), against the earlier ruling by the North Gauteng High Court that the award to us of the tender by SASSA would not be set aside. The Supreme Court also upheld our and SASSA-s appeal against the High Court-s orders that the process conducted in awarding the contract was illegal and invalid and that we and SASSA pay AllPay-s costs occasioned by the court proceedings. The Supreme Court also ordered AllPay to pay our and SASSA-s costs occasioned by the court proceedings, including the cost of three counsel. The judges presiding at the Supreme Court hearing unanimously ruled that there were no unlawful irregularities in the tender process followed by SASSA. Accordingly, our SASSA contract to distribute social welfare grants to ten million South Africans every month, for a period of five years, remains in full force and effect. On April 18, 2013, AllPay applied for leave to appeal to the South African Constitutional Court, the highest court in the country, against the judgment of the Supreme Court. We and SASSA have opposed AllPay-s application. AllPay-s previous approach to the Constitutional Court, before the Supreme Court hearing and ruling, was rejected at that time. We cannot predict if AllPay-s leave to appeal will be granted or if it is granted, when or how the Constitutional Court would rule on the matter.
Suit against AllPay
In December 2012 we sued AllPay. In our lawsuit we are alleging that AllPay wrongfully and unlawfully and with the intention of injuring our reputation, infringing our goodwill and reducing our share price, competed unlawfully with us. We are seeking damages in the aggregate amount of ZAR 478 million (approximately $55 million based on the ZAR/US dollar exchange rate on December 11, 2012) plus interest and costs. The damages claimed may increase as we quantify the continued impact of AllPay-s actions. A trial date will be applied for after the exchange of the required pleadings and finalization of any interlocutory issues which may arise. It is unlikely that the matter will go to trial before June 30, 2013, the end of our current financial year.
Results of Operations by Segment and Liquidity
Our frequently asked questions and operating metrics will be updated and posted on our website ().
South African transaction-based activities
Segment revenue was $59 million in Q3 2013, up 27% compared with Q3 2012 in USD and up 37% on a constant currency basis. In ZAR, the increases in segment revenue were primarily due to higher revenues earned under our new SASSA contract. Segment operating income margin was (7%) and 19%, respectively, and declined primarily due to SASSA implementation costs. Excluding amortization of acquisition-related intangibles, Q3 2013 segment operating income margin was (5%), compared to 23% during Q3 2012.
International transaction-based activities
KSNET continues to contribute the majority of our revenues and operating income in this operating segment. Segment revenue was $33.1 million in Q3 2013, up 17% compared with Q3 2012 in USD and 27% on a constant currency basis and was modestly impacted by ISC in Iraq notifying NUETS that it would not renew its contracts upon their expiration. Operating margin for the segment is lower than most of our South African transaction-based businesses and was negatively impacted by the expiration of the Iraqi contracts with ISC and the related bad debt provision required as well as on-going competition in the Korean marketplace, but was partially offset by increased revenue contributions from KSNET. Excluding the amortization of intangibles, Q3 2013 operating income margin was 6% compared to 12% during Q3 2012.
Smart card accounts
Segment revenue was $8.6 million in Q3 2013, up 15% compared with Q3 2012 in USD and 23% on a constant currency basis. Q3 2013 segment operating income margin was 29%, compared to 45% during Q3 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 $1.6 million in Q3 2013, down 28% compared with Q3 2012 in USD and 22% lower on a constant currency basis, principally due to a decrease in lending activities. Q3 2013 segment operating income margin was 69% compared with 55% during Q3 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. Smart Life did not contribute to operating income in the third quarter of fiscal 2013 and is currently unable to issue new insurance policies as a result of the suspension of its license.
Hardware, software and related technology sales
Segment revenue was $8.7 million in Q3 2013, up 40% compared with Q3 2012 in USD and 51% on a constant currency basis. In constant currency, the increase in revenue resulted primarily from an increase in royalty fees and ad hoc hardware sales, offset by a lower contribution from most other major contributors to hardware and software sales. Excluding amortization of all intangibles, segment operating income margin was 20% compared to (21%) during Q3 2012.
Corporate/eliminations
The increase in our corporate expenses resulted primarily from legal fees we incurred in connection with the DOJ and SEC investigations, stock-based compensation and other corporate head office-related expenses.
Cash flow and liquidity
At March 31, 2013, we had cash and cash equivalents of $43 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, a scheduled repayment of our Korean debt and the acquisition of Pbel and SmartSwitch Botswana. For Q3 2013, net cash provided by operating activities was $12.2 million compared with $22.0 million in Q3 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 Q3 2013 and 2012 were $5.1 million and $13.9 million, respectively, and have decreased primarily due to lower capital expenditures related to our SASSA contract and the purchase of fewer payment processing terminals in Korea in Q3 2013.
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 (loss) 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 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, as well as (a) in fiscal 2013, DOJ and SEC investigations-related expenses and acquisition-related costs; and (b) in fiscal 2012, the effects of a change in South African tax law and the creation of a valuation allowance related to foreign tax credits, the profit on liquidation of SmartSwitch Nigeria and loss on sale of 10% of Smart Life. 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 loss 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 (loss) income which has been determined based on GAAP. Accordingly, this may differ to the headline (loss) 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 (loss) income adjusted for the loss (profit) on sale of property, plant and equipment, net of related tax effects, the loss attributable to the sale of 10% of Smart Life and the profit on liquidation of SmartSwitch Nigeria. Attachment C presents the reconciliation between our net (loss) income used to calculate (loss) earnings per share basic and diluted and HEPS basic and diluted.
Conference Call
We will host a conference call to review Q3 2013 results on May 10, 2013, at 8:00 Eastern Time. To participate in the call, dial 1-866-652-5200 (U.S. only), 1-855-669-9657 (Canada only), 0808-162-4061 (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, . 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 June 2, 2013.
About Net1 ()
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. Net1-s UEPS/EMV solution is also completely interoperable with global EMV standards that seamlessly permit access to all the UEPS functionality in a traditional EMV 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, and Ghana. 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.
Contacts:
Net 1 UEPS Technologies, Inc.
Dhruv Chopra
Vice President of Investor Relations
+1-212-626-6675
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