JOHANNESBURG, SOUTH AFRICA — (Marketwire) — 02/07/13 — Net 1 UEPS Technologies Inc. (NASDAQ: UEPS)(JSE: NT1) today announced results for the second quarter fiscal 2013.
Summary Financial Metrics
(1) Fundamental net income and earnings per share are non-GAAP measures and are 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 Q2 2013 and Q2 2012 results
Comments and Outlook
“We enrolled 12 million citizens by the end of January as part of our SASSA implementation and remain on track to complete bulk enrollment by the end of March 2013,” said Dr. Serge Belamant, Chairman and Chief Executive Officer of Net1. “We continue to cooperate with the DOJ and SEC on their investigations, but as a result of these investigations, we are experiencing some adverse impact from the damage caused to our reputation, including our ability to execute certain aspects of our strategic plan. The Supreme Court will hear the appeal of the August 2012 High Court judgment on February 15. We believe we have a strong case and look forward to presenting our arguments to the Supreme Court,” 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 are materially but proportionally higher than anticipated,” said Herman Kotze, Chief Financial Officer of Net1. “As a result, in fiscal 2013, we expect fundamental earnings per share to be at least $0.95 assuming a constant currency base of ZAR 7.72/$1 and using our fiscal 2012 share count of 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 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 (those individuals who receive the actual payment and are issued with our UEPS/EMV smart card), as well as the grant beneficiaries (those individuals who have qualified for the social grant, but are not necessarily the recipient of the grant). 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. 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 for the entire second quarter of fiscal 2013from 2,500 to approximately 5,500. The total number of temporary employees is significantly more than the 2,500 we previously expected at the beginning of fiscal 2013 as the actual number of individuals (grant recipients plus grant beneficiaries) that SASSA has asked us to enroll has increased substantially. During Q2 2013, we enrolled a further 2.7 million grant recipients and an additional 3.8 million beneficiaries.
During Q2 2013 we incurred direct implementation expenses of approximately $18.0 million (ZAR 157.1 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. Our implementation expenditure during Q2 2013 was materially higher than we had previously anticipated due to the significant number of grant recipients and beneficiaries that we enrolled during the quarter, especially in the rural and deep rural areas. In order to meet our enrollment obligations in accordance with the timetable agreed with SASSA we incurred higher than anticipated temporary infrastructure hire, travel and staff expenditures. We expect this level of expenditure to reduce slightly during the third quarter of fiscal 2013, as our efforts are now focused primarily on urban areas. We also expensed $3.0 million (ZAR 26.6 million) related to the cost of the UEPS/EMV smart cards issued during the quarter, which is not included in the $18.0 million (ZAR 157.1 million) above.
We also incurred approximately $0.7 million in capital expenditures related to the implementation during Q2 2013. Since inception of the implementation we have incurred cumulative capital expenditures of $25.2 million. We anticipate cumulative capital expenditures related to the ramp of our national contract to be in the $30 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.
When we signed our Service Level Agreement with SASSA in February 2012, we anticipated total cash outlays of approximately $68 to $95 million from February 2012 through March 2013, including direct implementation costs of $5-10 million per quarter, as well as capital expenditures of $45-50 million, in order to build our infrastructure, register 15.6 million beneficiaries and roll out our biometrically secure UEPS/EMV technology nationally. With one more quarter of bulk enrollment remaining, our total cash outlay to date has been $74 million for direct implementation expenses, smart card costs and capital expenditures. We therefore would be 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 6 million people and therefore employ our temporary staff for longer, should result in our total cash outlay being between $100 and $105 million by March 2013. We also expect that by the end of the bulk enrollment period, roughly 10-15% of beneficiaries would not have come for re-registration and therefore we would have to rely on SASSA-s efforts to encourage those beneficiaries to re-register, which would require us to maintain at least some if not all of our enrollment infrastructure for a couple of months in Q4 2013. Given our enrollment experience to date however, we are unsure of what proportion of un-registered people would ultimately come for re-registration as some of the remainder may be duplicate recipients or recipients that do not exist altogether.
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 $60.8 million in Q2 2013, up 31% compared with Q2 2012 in USD and up 40% 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 3% and 34%, respectively, and declined primarily due to SASSA implementation costs. Excluding amortization of acquisition-related intangibles, Q2 2013 segment operating income margin was 6%, compared to 38% during Q2 2012.
International transaction-based activities
KSNET continues to contribute the majority of our revenues in this operating segment. Segment revenue was $33.1 million in Q2 2013, up 15% compared with Q2 2012 in USD and 23% 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 continued competition in the Korean marketplace but was partially offset by increased revenue contributions from KSNET, NUETS- initiative in Iraq and SmartSwitch Botswana and favorable currency movement between the Korean won and the US dollar. Excluding the amortization of intangibles but including the start-up costs referenced above, Q2 2013 operating income margin was 11% compared to 12% during Q2 2012.
Smart card accounts
Segment revenue was $8.2 million in Q2 2013, up 13% compared with Q2 2012 in USD and 21% on a constant currency basis. Q2 2013 segment operating income margin was 29%, compared to 45% during Q2 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 Q2 2013, down 26% compared with Q2 2012 in USD and 20% lower on a constant currency basis, principally due to a decrease in lending activities. Q2 2013 segment operating income margin was 72% compared with 53% during Q2 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 $7.9 million in Q2 2013, up 4% compared with Q2 2012 in USD and 12% 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 10% compared to 12% during Q2 2012.
Cash flow and liquidity
At December 31, 2012, we had cash and cash equivalents of $38 million, down from $39 million at June 30, 2012. The decrease in our cash balances from June 30, 2012, was primarily from 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 Q2 2013, net cash utilized by operating activities was $6.9 million compared with $6.2 million in Q2 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 Q2 2013 and 2012 were $5.6 million and $5.1 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 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 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, 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 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 Q2 2013 results on February 8, 2013, 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, . 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 March 1, 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. 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.
Net 1 UEPS Technologies Inc.
Attachment A
Operating segment revenue, operating income and operating margin:
Three months ended December 31, 2012 and 2011 and September 30, 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:
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:
Contacts:
Net 1 UEPS Technologies Inc.
Dhruv Chopra
Vice President of Investor Relations
+1-212-626-6675
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