Net 1 UEPS Technologies, Inc. Announces 2010 Third Quarter Results

JOHANNESBURG, May 6 /PRNewswire-FirstCall/ -- Net 1 UEPS Technologies, Inc. ("Net1" or the "Company") (Nasdaq: UEPS; JSE: NT1) today announced results for the three and nine months ended March 31, 2010. Revenue during 3Q 2010 was $72.3 million, a year over year increase of 29% in US dollars ("USD") and a decline of 2% in constant currency. Earnings per share under US generally accepted accounting principles ("GAAP") in 3Q 2010 was $0.41 versus $0.26 a year ago, an increase of 58% in USD and 19% in constant currency. Fundamental earnings per share for 3Q 2010 was $0.51 compared to $0.34 in 3Q 2009, representing an increase of 50% in USD and 13% in constant currency.  

Revenue during year to date fiscal 2010 ("F2010") was $211.7 million, a year over year increase of 14% in US dollars ("USD") and a decline of 4% in constant currency compared to year to date fiscal 2009 ("F2009"). Earnings per share under US generally accepted accounting principles ("GAAP") during F2010 was $1.20 versus $1.20 a year ago, the same in USD and a decrease of 16% in constant currency. Fundamental earnings per share for F2010 was $1.47 compared to $1.08 for F2009, representing an increase of 36% in USD and 14% in constant currency.

Summary Financial Metrics

(1) Fundamental net income and earnings per share is GAAP net income and earnings per share excluding the amortization of acquisition-related intangible assets, net of deferred taxes, and stock-based compensation charges. In addition, the calculation of fundamental net income and earnings per share for 3Q 2010 and 3Q 2009 and F2010 and F2009 also excludes, where applicable, transaction-related costs, the effects of the change in the Company's fully distributed tax rate from 35.45% to 34.55%, JSE Limited ("JSE") listing costs, a bank facility fee, goodwill impairment and a foreign exchange gain, net of tax, related to a short-term investment.

(2) GAAP basic and fundamental earnings per share for 3Q 2009 and F2009, have been retrospectively adjusted to include participating securities in the weighted average number of outstanding shares of common stock.

The following factors had a significant impact on the comparability of Net1's 3Q 2010 results to last year:

• Favorable impact from the weakness of the US dollar: Emerging market currencies were negatively impacted by the global financial crisis during the last three months of calendar 2008 and the first half of calendar 2009. The US dollar depreciated by 24% compared to the ZAR during the third quarter of fiscal 2010 compared to fiscal 2009 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 at lower operating margins than other transaction-based activity business: The MediKredit acquisition positively impacted on the Company's revenue during the third quarter of fiscal 2010, however, because MediKredit generates a lower operating margin than the Company's other transaction-based activity businesses, it negatively affected reported segment margins;
• 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: Hardware, software and related technology sales segment continues to be adversely impacted by lower revenues, primarily as a result of fewer ad hoc sales to the Bank of Ghana when compared to a year ago, and overall margin pressure at Net1 UAT and weaker demand for the Company's products as well as pricing pressures resulting from the global recession, all of which was partially offset by hardware sales to Iraq;
• Intangible asset amortization related to acquisitions: Reported results were adversely impacted by additional intangible asset amortization of approximately $0.5 million related to the RMT acquisition, which closed in April 2009 and $0.5 million related to the MediKredit acquisition, which closed in January 2010;
• Non-recurring items: During the third quarter of fiscal 2009 the Company recognized a loss on the sale of its traditional microlending business of $0.7 million (ZAR 7.4 million); and
• Lower weighted-average number of shares used to calculate earnings per share: Our basic and diluted earnings per share were positively impacted by the lower weighted-average number of shares resulting from the repurchase of our common stock from Brait S.A investment affiliates in July 2009.

Comments and Outlook

"I am extremely pleased with our third quarter results, which demonstrate the strength of our business model and the power of our technology," said Dr. Serge Belamant, Chairman and Chief Executive Officer of Net1. "We recognize that the pace of our international expansion has been slower than expected, however we have the management commitment, proposals and incentives to drive accelerating growth in our new initiatives over the coming quarters. We remain in active discussions with the South African government for the distribution of social welfare grants, and anticipate a conclusion to the process over the next 4-6 weeks. We are and expect to remain an integral distributor of welfare grants for the South African government. We are committed to driving long-term sustainable growth for all our stakeholders and to that effect, I am pleased to announce that our Board has doubled our share repurchase authorization to $100 million. I would also like to welcome the MediKredit and FIHRST teams to the Net1 family," he concluded.

"While our full year 2010 constant currency results will ultimately depend on changes, if any, in the terms of our contract with SASSA, which may be applied retrospectively to April 1, 2010 to coincide with government's fiscal year, we are currently unable to accurately forecast our constant currency guidance until our negotiations with SASSA have been finalized," said Herman Kotze, Chief Financial Officer of Net1. "Our growth during 3Q 2010 was driven by EasyPay, Iraq and the addition of MediKredit," he concluded.

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 $50.9 million, up 41% compared with 3Q 2009 in USD and 7% on a constant currency basis. Revenue increased as a result of increased transaction volumes at EasyPay, the growing utilization of the Company's UEPS system in Iraq and the acquisition of MediKredit. Operating margin decreased to 53% from 60% during 3Q 2010 primarily due to additional intangible asset amortization related to the acquisition of MediKredit, lower margins in the Company's MediKredit operation compared with the Company's transaction-based activities and ad hoc hardware maintenance charges at Easypay, 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, 3Q 2010 segment operating margin was 55% compared with 61% during 3Q 2009.

   Smart card accounts

Smart card account revenue was $8.0 million, up 19% compared with 3Q 2009 in USD and 10% lower on a constant currency basis. Operating margin for the segment remained consistent at 45% for 3Q 2010 and 3Q 2009.

   Financial services

Financial services revenue was $1.1 million, down 15% compared with 3Q 2009 in USD and 36% on a constant currency basis, principally due to the divestiture of the Company's traditional microlending business in 3Q 2009. However, operating margin for this segment, adjusted for the loss related to the sale in 3Q 2009, improved significantly to 72% from 35% in 3Q 2009 as a result of the sale of this low-margin business, and higher profitability from the Company's underlying UEPS-based lending activities.

   Hardware, software and related technology sales

Hardware, software and related technology sales revenue was $12.3 million, up 4% compared with 3Q 2009 in USD and down 21% on a constant currency basis. The decrease in revenue and operating income was primarily due to lower revenues at Net1 UAT and lower ad hoc hardware sales in 2010 as compared with the prior year when the Company recorded revenue from sales under its Ghana contract, which was offset marginally by increased hardware sales to Iraq. As a result, operating margin for this segment decreased to (15)% from (12)% in 3Q 2009. Excluding amortization of all intangibles, segment operating margin was 5% compared to 12% during 3Q 2009.

   Cash flow and liquidity

At March 31, 2010, the Company had cash and equivalents of $184 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. For 3Q 2010, the Company generated operating cash flow of $31.7 million compared to $5.1 million in 3Q 2009. The increase in operating cash flow results mainly from the removal of the requirement to pre-fund social welfare grant payments in 4Q 2009. Capital expenditures for 3Q 2010 and 2009 were $1.0 million and $0.4 million, respectively. Capital expenditures for each of F2010 and F2009 were approximately $2.3 million and $3.7 million. For F2010, the Company generated operating cash flow of $82.4 million compared to $18.0 million in F2009.  During 3Q 2010 the Company did not repurchase any shares out of the $50 million authorization approved in February 2010.

Share repurchase authorization

On May 5, 2010, the Company's Board of Directors authorized an increase in the Company's share repurchase program  by an additional $50 million, resulting in a repurchase program of up to $100 million of the Company's common stock. The authorization does not have an expiration date.

The share repurchase authorization will be used at management's discretion, subject to limitations imposed by SEC Rule 10b-18 and other legal requirements and subject to price and other internal limitations established by the Board.  Repurchases will be funded from the Company's available cash. Share repurchases may be made through open market purchases, privately negotiated transactions, or both. There can be no assurance that the Company will purchase any shares or any particular number of shares.

The authorization may be suspended, terminated or modified at any time for any reason, including market conditions, the cost of repurchasing shares, liquidity and other factors that management deems appropriate.

FIHRST purchase

On March 31 2010, the Company acquired the FIHRST business and related software for ZAR 70 million (approximately $9 million) in cash. FIHRST offers a third party payroll payments solution to South African companies, representing approximately 700,000 employees with a transaction volume of approximately R40 billion per annum.

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 and nine months March 31, 2010 and 2009, include amortization of intangibles and stock-based compensation. In addition, in 2010, 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 nine months ended March 31, 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 third quarter results on May 7, 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 May 30, 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.

Net 1 UEPS Technologies, Inc.

Attachment A

Operating segment revenue, operating income and operating margin:

Net 1 UEPS Technologies, Inc.

Attachment B

Reconciliation of GAAP net income to fundamental net income:

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:

SOURCE Net 1 UEPS Technologies, Inc.