UEPS Net 1 Ueps Technologies Inc

JOHANNESBURG, Aug. 25, 2011 /PRNewswire/ -- Net 1 UEPS Technologies, Inc. (Nasdaq: UEPS; JSE: NT1) today announced results for the three months ended June 30, 2011 ("4Q 2011") and the full 2011 fiscal year ("F2011"). Revenue for 4Q 2011 was $97.4 million, a year over year increase of 42% in US dollars ("USD") and 28% in constant currency. During 4Q 2011, net income under US generally accepted accounting principles ("GAAP") was $6.8 million versus net loss of $17.0 million for the three months ended June 30, 2010 ("4Q 2010"). GAAP earnings per share for 4Q 2011 was $0.15 versus GAAP loss per share of $0.37 a year ago. Fundamental earnings per share for 4Q 2011 was $0.39 compared to $0.54 for 4Q 2010, representing a decrease of 28% in USD and 35% in constant currency.

Revenue for F2011 was $343.4 million, a year over year increase of 22% in USD and 13% in constant currency compared to fiscal 2010 ("F2010"). During F2011, net income under GAAP was $2.6 million versus net income of $39.0 million for F2010. Earnings per share under GAAP during F2011 was $0.06 versus earnings per share of $0.84 a year ago, a decline of 93% in USD and 94% in constant currency. Fundamental earnings per share for F2011 was $1.53 compared to $2.01 for F2010, representing a decrease of 24% in USD and 30% in constant currency.

Summary Financial Metrics

The following factors impacted the comparability of our 4Q 2011 and 4Q 2010 results:

• SASSA price and volume reductions: Our current SASSA contract provides for price and volume reductions from our previous contract, which reduced 4Q 2011 revenue and operating income;
• Valuation allowances related to Net1 UTA deferred tax assets: During 4Q 2011, we created a valuation allowance of $8.9 million related to Net1 UTA deferred tax assets;
• Favorable impact from the weakness of the US dollar: The US dollar depreciated by 10% against the ZAR during 4Q 2011 versus 4Q 2010 which positively impacted our results;
• Goodwill impairment during 4Q 2010: During 4Q 2010, we impaired goodwill of $37.4 million related to Net1 UTA which was allocated to our hardware, software and related technology sales segment. The impairment resulted in a net loss for 4Q 2010;
• Increased revenue from KSNET at lower operating margins, before acquired intangible asset amortization, than our legacy businesses: Our KSNET acquisition contributed to an increase in 4Q 2011 revenue, however, because KSNET has an operating margin, before acquired intangible asset amortization, that is lower than our legacy businesses, it negatively impacted our overall operating margin;
• Intangible asset amortization related to KSNET acquisition: In 4Q 2011, we recorded additional intangible asset amortization related to the acquisition of KSNET;
• Lower interest income and increased interest expense resulting from KSNET acquisition: Use of a portion of our cash balances and incurrence of long-term debt to fund the KSNET acquisition reduced our interest income and increased our interest expense for 4Q 2011;
• Continued contributions from EasyPay: EasyPay experienced an increase in transaction volumes in 4Q 2011 from growth in value-added services and higher than expected activity at retailers;
• Lower revenues and margins from hardware, software and related technology sales segment: Segment performance was adversely impacted by lower revenues from all contributors to this operating segment;
• Reversal of stock-based compensation charges: We reversed prior year stock-based compensation charges of $3.5 million, primarily as a result of the forfeiture of a portion of the performance-based restricted stock granted in August 2007;
• Restructuring charges incurred by Net1 UTA: During 4Q 2011, we incurred restructuring charges related to our Net1 UTA operations of $0.6 million, net of tax benefit; and
• Transaction-related expenses included in selling, general and administration expense: During 4Q 2011, we incurred non-deductible transaction-related expenses of $0.4 million, primarily for the KSNET acquisition.

Comments and Outlook

"While fiscal 2011 was a challenging year for Net1, it was also transformational with the acquisition of KSNET and the commercialization of some of our newer technologies," said Dr. Serge Belamant, Chairman and Chief Executive Officer of Net1. "We remain committed to SASSA and look forward to the outcome of the current tender process. In the mean time, we will focus on driving incremental long-term growth by building on our existing capabilities at KSNET and EasyPay and scaling up our newer initiatives and technologies," he concluded.

"During fiscal 2012, we anticipate growth at KSNET and EasyPay and some of our other smaller units. However, we expect our pension and welfare business to remain flat and our earnings growth to be weighed down by our meaningful investments in MVC, XeoHealth and EP Kiosk. As a result of these factors and assuming our existing contract with SASSA remains in effect for the full year on the existing terms and conditions, we would expect to generate Fundamental EPS of at least $1.55 on a constant currency basis in fiscal 2012," said Herman Kotze, Chief Financial Officer of Net1.

Results of Operations

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

South African transaction-based activities

South African transaction-based activities revenue was $50.3 million in 4Q 2011, consistent when compared with 4Q 2010 in USD and 10% lower on a constant currency basis. In ZAR, the decrease in revenue was primarily due to the lower economics of the current SASSA contract, compared with our previous contract, which was partially offset by increased transaction volumes at EasyPay and the inclusion of FIHRST. Operating income margin of our South African transaction-based activities decreased to 40% from 51% a year ago. The decrease was primarily due to the lower revenues generated under the SASSA contract, additional intangible asset amortization related to the acquisition of MediKredit and FIHRST and lower margins at MediKredit and FIHRST compared with our legacy South African transaction-based activities. Excluding amortization of acquisition-related intangibles, 4Q 2011 segment operating margin was 43% compared with 54% during 4Q 2010.

International transaction-based activities

KSNET is the largest contributor to the international transaction-based activities segment. International transaction-based activities revenue was $27.9 million and segment operating margin was 3% in 4Q 2011. Excluding the amortization of intangibles but including the start up costs related to the launch of Net1 Virtual Card in the United States, segment operating margin was 15%.

Smart card accounts

Smart card account revenue was $8.6 million in 4Q 2011, up 10% compared with 4Q 2010 in USD and 1% lower on a constant currency basis. Operating margin for the segment remained consistent at 45%.

Financial services

Financial services revenue was $2.3 million in 4Q 2011, up 86% compared with 4Q 2010 in USD and 67% higher on a constant currency basis, principally due to an increase in lending activities. Operating margin for this segment remained constant at 79% when compared to 4Q 2010.

Hardware, software and related technology sales

Hardware, software and related technology sales revenue was $8.3 million in 4Q 2011, down 13% compared with 4Q 2010 in USD and 22% lower on a constant currency basis. The decrease in revenue and operating income for 4Q 2011 was primarily due to lower revenues by all major contributors to this operating segment as a result of challenging trading conditions and the ad hoc nature of some of these sales. Excluding amortization of all intangibles and Net 1 UTA's restructuring charges, segment operating margin was (16)% compared to (11)% during 4Q 2010.

Cash flow and liquidity

At June 30, 2011, we had cash and cash equivalents of $95 million, down from $154 million at June 30, 2010. The decrease in cash was due primarily to the use of approximately $124.3 million to fund a portion of the KSNET purchase price and the payment of STC of $14.7 million incurred related to dividends paid from South Africa to the United States connected with the KSNET transaction. For 4Q 2011, we generated net cash flow of $12.8 million for operating activities, compared to $13.8 million in 4Q 2010. The decrease in operating cash flow resulted mainly from the SASSA price and volume reductions which were effective July 1, 2010. Capital expenditures for 4Q 2011 and 2010 were $5.6 million and $0.4 million, respectively. During 4Q 2011, we repurchased $1 million worth of shares under our $100 million authorization.  

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

Our GAAP net income (loss) and earnings (loss) per share for 4Q 2011, 4Q 2010, F2011 and F2010 include amortization of intangible assets, transaction-related costs and stock-based compensation. GAAP net income (loss) and earnings (loss) per share for 4Q 2011 and F2011 includes a valuation allowance related to Net1 UTA deferred tax assets, restructuring charges at Net1 UTA and amortization of facility fees related to the debt incurred to fund a portion of the purchase price of KSNET. F2011 also includes an impairment loss, net of deferred taxes and a net gain related to a forward exchange contract related to intercompany dividends. We excludes all of the above-mentioned amounts when calculating fundamental net income and earnings per share, because management believes that these adjustments enhance 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 (loss) 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 (loss) adjusted for impairment losses, net of taxes, and the loss (profit) on sale of property, plant and equipment, net of related tax effects. Attachment C presents the reconciliation between our net income (loss) used to calculate earnings (loss) per share basic and diluted and HEPS basic and diluted.

Conference Call

We will host a conference call to review 4Q 2011 and F2011 results on August 26, 2011 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 September 16, 2011.

About Net1 (www.net1.com)

We are a leading provider of alternative payment systems that leverage our 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.

We operate market-leading payment processors in South Africa, Republic of Korea, Ghana and Iraq. In addition, our proprietary Mobile Virtual Card technology offers secure mobile payments and banking services in developed and emerging countries.

We have 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.