UEPS Net 1 Ueps Technologies Inc

JOHANNESBURG, Aug. 26 /PRNewswire-FirstCall/ -- Net 1 UEPS Technologies, Inc. ("Net1" or the "Company") (Nasdaq: UEPS; JSE: NT1) today announced results for the three months ("4Q 2010") and year ended June 30, 2010 ("F2010"). Revenue for 4Q 2010 was $68.7 million, a year over year increase of 11% in US dollars ("USD") and 2% in constant currency.  During 4Q 2010, net loss under US generally accepted accounting principles ("GAAP") was $17.0 million versus  net income of $18.2 million for the three months ended June 30, 2009 ("4Q 2009") and includes a $37.4 million goodwill impairment charge related to the Company's Hardware, software and related technology sales segment for 4Q 2010. GAAP loss per share for 4Q 2010 was $0.37 versus GAAP earnings per share of $0.33 a year ago. Fundamental earnings per share for 4Q 2010 was $0.54 compared to $0.38 for 4Q 2009, representing an increase of 42% in USD and 30% in constant currency.

Revenue for F2010 was $280.4 million, a year over year increase of 14% in US dollars and a decline of 3% in constant currency compared to the year ended June 30, 2009 ("F2009"). Earnings per share under GAAP during F2010 was $0.84 versus $1.53 a year ago, a decline of 45% in USD and 53% in constant currency. Fundamental earnings per share for F2010 was $2.01 compared to $1.46 for F2009, representing an increase of 38% in USD and 17% in constant currency.

Summary Financial Metrics

The following factors had significant impact on the comparability of our 4Q 2010 and 4Q 2009 results:

• Favorable impact from the weakness of the US dollar: The US dollar depreciated by 8% against the ZAR during 4Q 2010 which had a positive impact on the Company's reported results;
• Goodwill impairment losses: During 4Q 2010, the Company recognized a goodwill impairment loss of $37.4 million (ZAR 284.4 million) related to Net1 UTA which has been allocated to its Hardware, software and related technology sales segment;
• Increased transaction volumes at EasyPay: Reported results were positively impacted by increased transaction volumes at EasyPay resulting primarily from growth in value-added services;
• Increased user adoption in Iraq: Reported results were favorably impacted by increased transaction revenues from the adoption of Net1's UEPS technology in Iraq;
• Lower revenues and margins from hardware, software and related technology sales segment: Hardware, software and related technology sales segment was adversely impacted, in addition to the goodwill impairment discussed above, by lower revenues and overall margin generated by Net1 UTA, by fewer ad hoc sales to the Bank of Ghana and weaker demand for the Company's products as well as pricing pressures resulting from the global recession in calendar 2009, all of which was partially offset by hardware sales to Iraq;
• Lower net intangible asset amortization: In ZAR, reported results for 4Q 2010 were positively impacted by lower intangible asset amortization as RMT intangibles assets were fully amortized in 3Q 2010 and the majority of Prism and EasyPay's acquisition-related intangible assets were fully amortized in F2009. These intangible asset amortization decreases were offset by increases in acquisition-related intangible asset amortization related to the FIHRST and MediKredit acquisitions;
• Lower net interest income: Interest income, net, was adversely impacted by lower average daily ZAR cash balances and a lower average deposit rate during 4Q 2010 compared to 4Q 2009; and
• 2009 profit on sale of traditional microlending business: During 4Q 2009, the Company recognized a profit on the sale of its traditional microlending business of $1.2 million (ZAR 9.9 million).

SASSA Contract Update

On August 24, 2010, the Company entered into a new service level agreement with the South African Social Security Agency ("SASSA") which replaces its previous SASSA contract that expired on June 30, 2010. The new agreement is retroactively effective from July 1, 2010 and expires on March 31, 2011. Under the new contract, the Company will continue to provide its social welfare grants distribution service to SASSA in five of South Africa's nine provinces. As was the case with the Company's previous contract with SASSA, the new contract contains a standard pricing formula for all provinces based on a transaction fee per beneficiary paid, regardless of the number or amount of grants paid per beneficiary, calculated on a guaranteed minimum number of beneficiaries per month. However, the new contract provides for a reduction in both the level of the transaction fee per beneficiary paid and the guaranteed minimum number of beneficiaries. Because the Company continues to derive a substantial percentage of its revenues from the SASSA contract, it expects that the terms of the new contract will materially reduce its revenues, operating income, net income and cash flow for the year ended June 30, 2011.

Comments and Outlook

"This year has been difficult for us due primarily to the uncertainties pertaining to our SASSA contract," said Dr. Serge Belamant, Chairman and Chief Executive Officer of Net1. "South Africa has been put under austerity measures that have led to the cancellation of many social benefits which were found to have been granted without proper consideration or approval. In addition, reductions in fees were mandated to all grant distributors to reduce the overall cost of grant administration. We expect personnel and structural changes to be made within SASSA during 2011 which should lead to a more specific governmental direction  and to which we can align ourselves in order to continue to play a significant role in this market segment," he said.

"On a more positive note, I am excited about the continuing success of our technology in Iraq and Ghana as well as the imminent launch of our Virtual Card initiative in the United States. The company continues to grow in strength in many different markets and our diverse product range enables us to participate across multiple transaction processing segments. Looking forward, we will continue to focus our strategic efforts on the diversification of our business, by leading with innovative and relevant technology, strengthening of business development teams, and deploying capital where appropriate toward acquisition opportunities. We remain committed to driving long-term sustainable growth for the company and thus for all of our stakeholders," he concluded.

"Given the fact that our new service level agreement with SASSA runs through March 31, 2011, to coincide with government's fiscal year end, it is difficult to provide guidance for the full fiscal year 2011. However, assuming the contract were to run for the duration of fiscal year 2011, we would expect to generate Fundamental EPS of at least $1.50 on  a constant currency basis," said Herman Kotze, Chief Financial Officer of Net1.

Results of Operations

Net1's frequently asked questions and operating metrics will be updated and posted on the Company's website (www.net1.com).

   Transaction-based activities

Transaction-based activities revenue was $50.1 million, up 28% compared with 4Q 2009 in USD and 17% higher on a constant currency basis. Revenue increased as a result of higher transaction volumes at EasyPay, the growing utilization of the Company's UEPS system in Iraq and the acquisition of MediKredit and FIHRST. Operating margin decreased to 51% from 58% during 4Q 2010 primarily due to additional intangible asset amortization related to the acquisition of MediKredit and FIHRST, and lower margin contribution from the Company's MediKredit and FIHRST operations compared with the Company's legacy transaction-based activities, which was partially offset by increased transaction fees from the utilization of the Company's UEPS system in Iraq. Excluding amortization of acquisition-related intangibles, 4Q 2010 segment operating margin was 54% compared with 60% during 4Q 2009.

   Smart card accounts

Smart card account revenue was $7.8 million, up 2% compared with 4Q 2009 in USD and 6% lower on a constant currency basis. Operating margin for the segment remained consistent at 45%.

   Financial services

Financial services revenue was $1.2 million, up 42% compared with 4Q 2009 in USD and 31% higher on a constant currency basis, principally due to an increase in lending activities. Excluding the impact of the 3Q 2009 profit on sale of the traditional microlending business and the allowance for credit losses related to the sale,  operating margin for this segment increased to 79% from 32% in 4Q 2009 largely as a result of the increased lending activities.

   Hardware, software and related technology sales

Hardware, software and related technology sales revenue was $9.6 million, down 31% compared with 4Q 2009 in USD and 37% lower on a constant currency basis. The decrease in revenue and operating income for 4Q 2010 was primarily due to lower revenues at Net1 UTA and the goodwill impairment discussed above, as well as lower ad hoc hardware sales in 4Q 2010 as compared with the prior year when the Company recorded revenue from sales under its Ghana contract. These decreases were offset marginally by increased hardware sales to Iraq. Excluding amortization of all intangibles and the impairment of goodwill, segment operating margin was (11%) compared to 3% during 4Q 2009.

For 4Q 2010, the Company recognized an impairment loss of $37.4 million (ZAR 284.4 million) as a result of deteriorating trading conditions in this segment, particularly at Net1 UTA, and uncertainty surrounding contract finalization dates which would impact future cash flows.

   Cash flow and liquidity

At June 30, 2010, the Company had cash and equivalents of $154 million, down from $221 million at June 30, 2009.  The decrease was primarily attributable to the repurchase of the Company's common stock from Brait S.A.'s investment affiliates in July 2009. For 4Q 2010, operating cash flow was negative $13.8 million, compared to positive $88.8 million in 4Q 2009. The decrease in operating cash flow resulted mainly from the removal of the requirement to pre-fund social welfare grant payments in 4Q 2009, lower accounts payable and other payables balances, as well as an ad hoc payment of taxation, Secondary Taxation on Companies in South Africa of $12.1 million. Capital expenditures for 4Q 2010 and 2009 were $0.4 million and $1.0 million, respectively. Capital expenditures for each of F2010 and F2009 were approximately $2.7 million and $4.7 million. For F2010, the Company generated operating cash flow of $68.7 million compared to $106.8 million in F2009.  During 4Q 2010, the Company did not repurchase any shares under its $100 million authorization.

Use of Non-GAAP Measures

US securities laws require that when Net1 publish any non-GAAP measures, it 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

Under GAAP, the Company is required to fair value all intangible assets on the date of the acquisition and amortize these intangible assets over their expected useful lives. In addition, under GAAP, the Company is required to measure the fair value of options and other stock-based awards, and recognize a stock-based compensation charge over the requisite service period. The Company's GAAP net income and earnings per share for the three months and year ended June 30, 2010 and 2009 include amortization of intangibles and stock-based compensation. In addition, in 2010, goodwill impairment and transaction-related costs are included and in 2009, JSE listing costs, a bank facility fee, goodwill impairment and a foreign exchange gain, net of tax, related to a short-term investment are included. Finally, the effect of the change in the fully-distributed tax rate from 35.45% to 34.55% in July 2008 was included in net income and earnings per share for the year ended June 30, 2009. The Company 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 the Company's 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 the Company's 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 loss (profit) on sale of property, plant and equipment, net of related tax effects. Attachment C presents the reconciliation between the Company's net income used to calculate earnings per share basic and diluted and HEPS basic and diluted.

Conference Call

Net1 will host a conference call to review fourth quarter results on August 27, 2010, at 8:00 a.m. 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) five minutes prior to the start of the call. Callers should request "Net1 call" upon dial-in. The call will also be webcast on the Net1 homepage, www.net1.com. Please click on the webcast link at least 10 minutes prior to the call. A webcast of the call will be available for replay on the Net1 website through September 17, 2010.

About Net1 (www.net1.com)

Net1 provides its universal electronic payment system, or UEPS, as an alternative payment system for the unbanked and under-banked populations of developing economies. Net1's market-leading system enables the estimated four billion people who generally have limited or no access to a bank account, to enter affordably into electronic transactions with each other, government agencies, employers, merchants and other financial service providers. Net1's universal electronic payment system, or UEPS, uses smart cards that operate in real-time but offline, unlike traditional payment systems offered by major banking institutions that require immediate access through a communications network to a centralized computer. This offline capability means that users of the Net1 system can enter into transactions at any time with other card holders even in the most remote areas so long as a portable offline smart card reader is available. In addition to payments and purchases, UEPS can be used for banking, healthcare management, international money transfers, voting and identification.

Net1 also focuses on the development and provision of secure transaction technology, solutions and services and offers transaction processing, financial and clinical risk management solutions to both funders and providers of healthcare.  Its core competencies around secure online transaction processing, cryptography and integrated circuit card (chip/smartcard) technologies are principally applied to electronic commerce transactions in the telecommunications, banking, retail, petroleum and utilities market sectors.

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 the Company's actual results, levels of activity, performance or achievements to differ materially from those expressed in such forward-looking statements are included in the Company's filings with the Securities and Exchange Commission. The Company undertakes no obligation to revise any of these statements to reflect future circumstances or the occurrence of unanticipated events.