Net 1 UEPS Technologies, Inc. Reports Third Quarter 2017 Results

JOHANNESBURG, SOUTH AFRICA--(Marketwired - May 04, 2017) - Net 1 UEPS Technologies, Inc. (NASDAQ: UEPS) (JSE: NT1) today released results for Q3 2017.

• Q3 2017 Revenue of $147.9 million, an increase of 10%, down 8% in constant currency;
• Q3 2017 Fundamental net income of $23.5 million, an increase of 19%, down 1% in constant currency; and
• Q3 2017 FEPS of $0.43, an increase of 0%, which includes a 19% adverse impact related to higher share count.

Factors impacting comparability of our Q3 2017 and Q3 2016 results

• Earnings and FEPS dilution impact from issue of additional shares of common stock: Our Q3 2017 fundamental earnings per share was impacted by the weighted average issuance of five million shares of our common stock in February 2017 and 10 million shares in Q4 2016, partially offset by buy backs of 5.5 million shares;
• Favorable impact from the weakening of the U.S. dollar against South African Rand: The U.S. dollar depreciated by 16% against the ZAR during Q3 2017, which positively impacted our reported results;
• Growth in lending and insurance businesses: We continued to experience volume growth and operating efficiencies in our lending and insurance businesses during Q3 2017, which has resulted in an improved contribution to our financial inclusion revenue and operating income;
• Ongoing contributions from EasyPay Everywhere: EPE revenue and operating income growth was driven primarily by ongoing EPE adoption as we further expanded our customer base utilizing our ATM infrastructure;
• Masterpayment expansion costs: Masterpayment incurred additional investment as it grows its staff complement to execute its expansion plan into new markets;
• Regulatory changes in South Korea pertaining to fees on card transactions: The regulations governing the fees that may be charged on card transactions have adversely impacted our revenues and operating income in South Korea;
• Lower prepaid sales resulting from improved security features to our Manje products: The introduction of our new biometric-linking feature adversely impacted the number of transacting users purchasing prepaid products through our mobile channel;
• Higher transaction-related costs in fiscal 2017: We incurred $1.4 million in transaction-related costs pertaining to various acquisition and investment initiatives pursued during Q3 2017;
• Gain on acquisition of T24 during fiscal 2016: We recognized a fair value adjustment gain of $1.9 million related to the acquisition of T24 during Q3 2016. We accounted for T24 as an equity method investment prior to obtaining control and recognized a gain arising from the consolidation and purchase accounting adjustments related to the T24 acquisition; and
• Tax impact of dividends from South African subsidiary in fiscal 2016: Our income tax expense for Q3 2016 includes approximately $2.1 million related to the tax impact, including withholding taxes, resulting from distributions from our South African subsidiary during fiscal 2016.

"The last few months have been challenging, aggravated by the tarnishing of our reputation and questioning of our business practices due to frivolous and unsubstantiated public attacks. Although we devoted a substantial amount of time to manage these issues, we believe that we have made sufficient progress towards the finalization of our South African and international expansion strategy," said Serge Belamant, CEO of Net1. "Consistent with our service delivery track record over the last five years, the distribution of grants in April and May has gone smoothly and without any delay or interruption and we continue to fulfill our obligations in accordance with the Constitutional Court's order. We remain willing to support a smooth transition to SASSA or whomever they determine to be the most suitable service provider when our current contract expires. In the interim, we continue to provide seamless and timely access to grants for beneficiaries and our technology continues to save the South African government an estimated ZAR 2 billion per annum through the identification and removal of fraudulent beneficiaries," he added.

"We intend to shortly commence with the implementation of our strategic plan to accelerate growth, diversification and geographic footprint," added Serge Belamant. "In South Africa we will partner, invest in or acquire the right institutions to expand our addressable market and fuel innovation, which in turn will lead to the creation of new products and business models. Internationally, our UEPS/EMV banking platform will be the cornerstone from which we can service the needs of the developed and developing world, while also providing the bridge between the two," he concluded.

"We expect to make substantial progress towards completion of a number of investment transactions during the last quarter of fiscal 2017, including Blue Label, DNI and Cell C," said Herman Kotze, Chief Financial Officer of Net1. "These transactions will have a limited impact on our full year results and we reaffirm our fundamental earnings per share guidance for fiscal 2017 to be at least $1.69 using a constant currency base of ZAR 14.38/$1, a share count of 54.5 million shares, and a tax rate between 33%-35%," he concluded.

Recent Developments

Results of Operations by Segment and Liquidity

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

• South African transaction processing

Segment revenue was $64.0 million in Q3 2017, up 26% in USD compared with Q3 2016, and up 6% on a constant currency basis. In ZAR, the increase in segment revenue was primarily due to higher EPE transaction revenue as a result of increased usage of our ATMs, increased inter-segment transaction processing activities and a modest increase in the number of social welfare grants distributed. Operating income decreased primarily due to the impact of annual salary increases granted to our South African employees, partially offset by higher EPE transaction revenue as a result of increased usage of our ATMs and a modest increase in the number of social welfare grants distributed.

Our operating income margin for Q3 2017 and 2016 was 24% and 26%, respectively. Our fiscal 2017 margin includes higher EPE revenue, and an increase in the number of beneficiaries paid in Q3 2017, which was partially offset by annual salary increases granted.

• International transaction processing

Segment revenue was $41.5 million in Q3 2017, up 2% in USD compared with Q3 2016, and down 15% on a constant currency basis. In calendar 2016, South Korean regulators introduced specific regulations governing the fees that may be charged on card transactions, as is the case in most other developed economies. These regulations have a direct impact on card issuers in South Korea and consistent with global practices, card issuers have renegotiated their fees with South Korean VAN companies, including KSNET, which has had an adverse impact on KSNET's financial performance.

Segment revenue increased during Q3 2017, primarily due to the inclusion of Masterpayment; however, this growth was partially offset by a lower contribution from KSNET due to the regulatory changes described above. Operating income during Q3 2017 was lower due to lower revenue at KSNET, losses incurred by Masterpayment as it grows its staff complement to execute its expansion plan into new markets, and ongoing ZAZOO start-up costs in the UK and India, which was partially offset by a positive contribution by T24. Operating income margin for Q3 2017 and 2016 was 5% and 12%, respectively.

• Financial inclusion and applied technologies

Segment revenue was $56.9 million in Q3 2017, up 5% in USD compared with Q3 2016 and down 12% on a constant currency basis. In ZAR, Financial inclusion and applied technologies revenue decreased primarily due to fewer prepaid airtime and other value added services sales, as well as fewer ad-hoc terminal sales, partially offset by increased volumes in our lending and insurance businesses, and an increase in inter-segment revenues. Operating income margin for the Financial inclusion and applied technologies segment was 25% and 21% during Q3 fiscal 2017 and 2016, respectively, and has increased primarily due to improved revenues from our lending and insurance businesses and an increase in inter-segment revenues and fewer low margin prepaid product sales, offset by fewer ad hoc terminal and annual salary increases granted to our South African employees.

• Corporate/eliminations

Our corporate expenses have increased primarily due to higher transaction-related expenditures, higher amortization costs and modest increases in U.S. dollar denominated goods and services purchased from third parties and directors' fees. Our corporate expenses for the third quarter of fiscal 2016, includes a gain related to the acquisition of T24.

• Cash flow and liquidity

At March 31, 2017, our cash and cash equivalents were $223.0 million, and excludes $44.7 million of restricted cash. The decrease in our cash balances from June 30, 2016, was primarily due to repurchase of shares of our common stock; unscheduled repayments of our Korean debt; payment of taxes; the investment in MobiKwik, C4U Malta and Pros Software; a loan to Finbond and capital expenditures, which was partially offset by the sale of 5 million shares of our common stock and expansion of most of our core businesses.

Excluding the impact of taxes, interest received and interest paid under our Korean debt, the increase in cash from operating activities resulted from improved trading activity during fiscal 2017, offset by the timing of receipt of amounts from customers. Capital expenditures for Q3 2017 and 2016 were $1.9 million and $8.1 million, respectively, and have decreased primarily due to the acquisition of fewer payment processing terminals in South Korea. We provided a $2.0 million loan to KZ One, the holding company of our Nigerian initiative One Credit. We sold 5 million shares of our common stock for $45.0 million and received approximately $0.6 million from the exercise of stock options. We also utilized approximately $0.3 million of our Korean borrowings to pay quarterly interest due.

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 Korean debt facility fees and US government investigations-related expenses as well as, in fiscal 2017, a refund (net of taxes) related to Korean industry-wide litigation that has now been finalized and costs related to transactions and acquisition consummated or ultimately not pursued. 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) loss on sale of property, plant and equipment. Attachment C presents the reconciliation between our net income used to calculate earnings per share basic and diluted and HEPS basic and diluted and the calculation of the denominator for headline diluted earnings per share.

Conference Call

We will host a conference call to review Q3 2017 results on May 5, 2017, at 8:00 Eastern Time. To participate in the call, dial 1-855-481-5362 (US and Canada), 0808-162-4061 (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 the Net1 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 the Net1 website through May 28, 2017.

About Net1 (www.net1.com)

Net1 is a leading provider of alternative payment systems that leverage its Universal Electronic Payment System ("UEPS") or utilize its proprietary mobile technologies. The Company operates market-leading payment processors in South Africa and the Republic of Korea. Through Transact24, Net1 offers debit, credit and prepaid processing and issuing services for Visa, MasterCard, ChinaUnionPay, Alipay and WeChat in China and other territories across Asia-Pacific, Europe and Africa, and the United States. Through Masterpayment, Net1 provides payment processing and enables working capital financing in Europe.

UEPS permits the Company 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. Net1's UEPS/EMV solution is interoperable with global EMV standards that seamlessly enable access to all the UEPS functionality in a traditional EMV environment. In addition to payments, UEPS can be used for banking, healthcare management, payroll, remittances, voting and identification.

Net1's mobile technologies include its proprietary mobile payments solution -- MVC, which offers secure mobile-based payments, as well as mobile banking and prepaid value-added services in developed and emerging countries.

Net1 has a primary listing on the NASDAQ and a secondary listing on the Johannesburg Stock Exchange.

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.

Weighted average number of shares used to calculate headline earnings per share diluted represent the denominator for basic weighted-average common shares outstanding and unvested restricted shares expected to vest plus the effect of dilutive securities under GAAP. We use this number of fully-diluted shares outstanding to calculate headline earnings per share diluted because we do not use the two-class method to calculate headline earnings per share diluted.