Net 1 UEPS Technologies, Inc. Announces 2011 First Quarter Results

JOHANNESBURG, Nov. 9, 2010 /PRNewswire-FirstCall/ -- Net 1 UEPS Technologies, Inc. ("Net1" or the "Company") (Nasdaq: UEPS; JSE: NT1) today announced results for the three months ended September 30, 2010 ("1Q 2011"). Revenue for 1Q 2011 was $64.3 million, a year over year decrease of 2% in US dollars ("USD") and 7% in constant currency.  During 1Q 2011, net income under US generally accepted accounting principles ("GAAP") was $7.4 million versus net income of $17.9 million for the three months ended September 30, 2009 ("1Q 2010"). GAAP earnings per share for 1Q 2011 was $0.16 versus GAAP earnings per share of $0.37 a year ago. Fundamental earnings per share for 1Q 2011 was $0.36 compared to $0.45 for 1Q 2010, representing a decrease of 20% in USD and 24% in constant currency.

The following factors had significant impact on the comparability of our 1Q 2011 and 1Q 2010 results:

• SASSA price and volume reductions: The Company's new contract with SASSA has reduced its revenue and operating income as a result of the previously announced price and volume reductions;
• Favorable impact from the weakness of the US dollar: The US dollar depreciated by 5% compared to the ZAR during the first quarter of fiscal 2011 compared to fiscal 2010 which has had a positive impact on the Company's reported results;
• Increased transaction volumes at EasyPay: Reported results were favorably impacted by increased transaction volumes at EasyPay resulting from growth in value-added services;
• Increased revenue from MediKredit and FIHRST at lower operating margins than other transaction-based activity business: The Company's MediKredit and FIHRST acquisitions positively impacted its revenue during the first quarter of fiscal 2011; however, because MediKredit generated a modest operating loss and FIHRST's operating margin is lower than the Company's other transaction-based activity businesses, they negatively impacted its operating margin. The inclusion of these businesses in the Company's results has also contributed to the increase in selling, general and administration expense;
• Increased user adoption in Iraq: Reported results were positively impacted by increased transaction revenues from the adoption of the Company's UEPS technology in Iraq;
• Lower revenues and margins from hardware, software and related technology sales segment: The Company's hardware, software and related technology sales segment continues to be adversely impacted by lower revenues generated by card sales and software maintenance and development activities and fewer ad hoc sales to Iraq when compared to a year ago, partially offset by increased hardware sales by Net1 UTA;
• Intangible asset amortization related to acquisitions: Reported results were adversely impacted by additional intangible asset amortization of approximately $0.5 million related to the acquisitions of MediKredit and FIHRST during the third quarter of fiscal 2010; and
• Non-recurring items included in selling, general and administration expense: During the first quarter of fiscal 2011, the Company recognized, in selling, general and administration expense, an unrealized foreign exchange loss of $2.6 million and incurred transaction-related expenses of $3.4 million, primarily for the acquisition of KSNET.

Comments and Outlook

"Our first quarter of fiscal 2011 was negatively impacted by the reduction in the economics of our contract with SASSA. Following the recent changes in the South African cabinet, we expect to work with the new leadership in the ensuing months to define a long-term solution for the administration of social grants in South Africa," said Dr. Serge Belamant, Chairman and Chief Executive Officer of Net1. "Our growth initiatives within South Africa and internationally, specifically in Iraq and Ghana, our new technologies such as Virtual Card and EasyPay Kiosks and increasing contributions from our acquisitions of KSNET, MediKredit and FIHRST leave us well-positioned to drive long-term revenue, earnings and cash flows. We remain committed to achieving long-term sustainable growth for the Company and thus for all of our stakeholders. Finally, I would also like to welcome the KSNET team to the Net1 family and we look forward to a prosperous relationship with them," he concluded.

"Our guidance of Fundamental EPS of at least $1.50 on a constant USD/ZAR currency basis for fiscal 2011 remains dependent on the continuation of our SASSA contract beyond March 31, 2011, on similar terms, as well as the incorporation of KSNET's results on a US GAAP basis with effect from November 2010," 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 $44.9 million, consistent when compared with 1Q 2010 in USD and 5% lower on a constant currency basis. In ZAR, the decreases in revenue were primarily due to the new SASSA nine month contract at lower economics, which was partially offset by increased transaction volumes at EasyPay, increased utilization of our UEPS system in Iraq and the inclusion of MediKredit and FIHRST. Operating margin decreased to 40% from 59% during 1Q 2011 primarily due to the lower revenues generated under our SASSA contract, additional intangible asset amortization related to the acquisition of MediKredit and FIHRST and lower margins in our recently-acquired transaction processing operations compared with legacy transaction-based activities, which was partially offset by increased transaction fees from the utilization of our UEPS system in Iraq.  Excluding amortization of acquisition-related intangibles, 1Q 2011 segment operating margin was 43% compared with 61% during 1Q 2010.

   Smart card accounts

Smart card account revenue was $8.0 million, down 1% compared with 1Q 2010 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 58% compared with 1Q 2010 in USD and 49% higher on a constant currency basis, principally due to an increase in lending activities. Operating margin for this segment increased to 74% from 67% in 1Q 2010 largely as a result of the increased lending activities.

   Hardware, software and related technology sales

Hardware, software and related technology sales revenue was $10.2 million, down 13% compared with 1Q 2010 in USD and 17% lower on a constant currency basis. The decrease in revenue and operating income for 1Q 2011 was primarily due to lower revenues generated by card sales and software maintenance and development, as well as lower ad hoc hardware sales to Iraq in 2011 as compared with the prior year, which was offset partially by increased hardware sales by Net1 UTA. In ZAR, the decrease in operating income was primarily due to lower sales activity. Excluding amortization of all intangibles and the impairment of goodwill, segment operating margin was (3)% compared to 7% during 1Q 2010.

   Cash flow and liquidity

At September 30, 2010, the Company had cash and cash equivalents of $200 million, up from $154 million at June 30, 2010.  For 1Q 2011, the Company generated operating cash flow of $30.2 million, compared to $37.0 million in 1Q 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 1Q 2011 and 2010 were $0.8 million and $0.6 million, respectively. During 1Q 2011, the Company did not repurchase any shares under its $100 million authorization.  On October 29, 2010, we used approximately $124 million of our cash to fund a portion of the KSNET purchase price.

Use of Non-GAAP Measures

US securities laws require that when the Company publishes any non-GAAP measures, it discloses the reason for using the non-GAAP measure and provides a 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

The Company's GAAP net income and earnings per share for 1Q 2011 and 1Q 2010 include amortization of intangible assets and stock-based compensation. In addition, GAAP net income and earnings per share for 1Q 2011 includes transaction-related costs and an unrealized foreign exchange loss described above. 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 first quarter results on November 10, 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 December 1, 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 recently acquired KSNET, Inc. KSNET services a broad range of industries in Korea, including credit card, retail and wholesale merchant, financial institutions, governmental organizations, utility companies and e-commerce businesses. It offers payment processing solutions including payment card and banking value added networks, payment gateways, cash receipt, purchase cards and point cards. It has a diverse merchant base and processed over 1.4 billion transactions in 2009.

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.

SOURCE Net 1 UEPS Technologies, Inc.