| Fri 6 Feb 2009, 8:00 | | NT1 - Net1 - Net 1 UEPS Technologies Inc. Announces 2009 Second Quarter |
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NT1
NT1
NT1 - Net1 - Net 1 UEPS Technologies, Inc. Announces 2009 Second Quarter
Results
Net 1 UEPS Technologies, Inc.
(Incorporated in Florida, U.S.A)
(IRS EIN 98-0171860)
NASDAQ share code: UEPS
JSE share code: NT1
ISIN: US64107N2062
("Net1" or "the Company")
Net 1 UEPS Technologies, Inc. Announces 2009 Second Quarter Results
Johannesburg, South Africa (February 5, 2009) - Net 1 UEPS Technologies, Inc.
("Net1" or the "Company") (NASDAQ: UEPS; JSE: NT1) today announced results for
the three and six months ended December 31, 2008.
Results
Three months ended December 31, 2008 and 2007
GAAP GAAP GAAP Fundamen- Fundamen- Fundamental
Q2 Q2 Variance tal Q2 tal Q2 Variance
2009 2008 % 2009 (1) 2008 (1) %
Net 27,762 20,318 37% 20,186 22,165 (9)%
income
(USD`000)
Earnings 49 36 36% 36 39 (8)%
per
share,
basic (US
cents)
Revenue 61,388 68,500 (10)% 61,388 68,500 (10)%
(USD`000)
(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, JSE Limited ("JSE") listing costs, a bank facility fee,
an impairment of goodwill and a foreign exchange gain related to a short-term
investment are excluded in calculating fundamental net income and earnings per
share.
Since the Company`s reporting currency is the US dollar ("USD") but its
functional currency is the South African rand ("ZAR"), and due to the impact
of currency fluctuations between the USD and the ZAR on the Company`s results
of operations, the Company also analyzes its results of operations in ZAR to
assist investors in understanding the changes in the underlying trends of its
business. The USD was significantly stronger against the ZAR during the three
months ended December 31, 2008, as compared with the prior period. The impact
of these changes on results of operations is shown under the column "Change"
in the tables of key metrics included in Attachment A at the end of this press
release.
GAAP GAAP GAAP Fundamen- Fundamen- Fundamental
Q2 Q2 Variance tal Q2 tal Q2 Variance
2009 2008 % 2009(1) 2008(1) %
Net 272,875 137,686 98% 198,411 150,203 32%
income
(ZAR`000)
Earnings 483 241 100% 351 263 33%
per
share,
basic
(ZAR
cents)
Revenue 603,387 464,192 30% 603,387 464,192 30%
(ZAR`000)
(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, JSE listing costs, a bank facility fee, an impairment of
goodwill and a foreign exchange gain related to a short-term investment are
excluded in calculating fundamental net income and earnings per share.
Six months ended December 31, 2008 and 2007
GAAP GAAP GAAP Fundamen- Fundamen- Fundamental
YTD YTD Variance tal YTD tal YTD Variance
2009 2008 % 2009 (1) 2008 (1) %
Net 54,006 38,246 41% 42,834 41,826 2%
income
(USD`000)
Earnings 95 67 42% 75 73 3%
per
share,
basic (US
cents)
Revenue 129,323 128,759 -% 129,323 128,759 -%
(USD`000)
GAAP GAAP GAAP Fundamen- Fundamen- Fundamental
YTD YTD Variance tal YTD tal YTD Variance
2009 2008 % 2009(1) 2008(1) %
Net 475,302 265,603 79% 380,870 290,459 31%
income
(ZAR`000)
Earnings 835.0 465.0 80% 669 509 31%
per
share,
basic
(ZAR
cents)
Revenue 1,138,159 894,180 27% 1,138,159 894,180 27%
(ZAR`000)
(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 effects of the change in the Company`s fully
distributed tax rate from 35.45% to 34.55%, JSE listing costs, a bank facility
fee, an impairment of goodwill and a foreign exchange gain related to a short-
term investment are excluded in calculating fundamental net income and
earnings per share.
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
earnings and headline earnings per share are non-GAAP measures.
Fundamental earnings
Under US generally accepted accounting principles ("GAAP"), the Company is
required to fair value all intangible assets on the date of 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 common share for the three and six months ended December 31, 2008
and 2007 include amortization of intangibles and stock-based compensation
charges related to stock options and other stock-based awards, as well as JSE
listing costs, a bank facility fee, an impairment of goodwill and a foreign
exchange gain related to a short-term investment. Finally, the effect of the
change in the fully distributed tax rate from 35.45% to 34.55% in July 2008 is
included in the Company`s net income and earnings per common share for the six
months ended December 31, 2008. The Company excludes all of the above-
mentioned amounts when calculating fundamental net income and earnings per
common 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 reconciliation between GAAP and
fundamental net income and earnings per common 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 are calculated using net income which has been
determined based on US 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 impairment of goodwill and profit on sale of property, plant
and equipment, net of related tax effects. Attachment C presents the
reconciliation between our net income used to calculate earnings per share
basic and diluted and HEPS basic and diluted.
Second Quarter Highlights
- Significant sales of licences and hardware by BGS to Sberbank;
- Listing of all of our common stock on the JSE;
- Full repayment of the $110 million short-term facility raised for the
acquisition of 80.1% of BGS and the realization of a $20.6 million
foreign exchange gain on an asset swap effected in anticipation of the
facility repayment;
- Receipt of an order for an additional 800,000 smart cards to be issued
to war victim beneficiaries and pension payment recipients in Iraq;
Continued widespread implementation of the UEPS technology across
multiple business segments in Ghana;
- Increased revenues and operating income in all provinces where we
distribute social welfare grants;
- Merchant acquiring system transactions increased 4% to $269.4 million
in the second quarter of fiscal 2009 from $258.9 million in the second
quarter of fiscal 2008 and the number of transactions processed per
terminal increased 31% from the second quarter of fiscal 2008;
- The total number of active UEPS smart card-based accounts increased 2%
to 4,061,100 as of December 31, 2008, compared to December 31, 2007;
and
- The number of transactions processed by EasyPay increased 15% from the
second quarter of fiscal 2008.
Comments and Outlook
"Our financial results once again speak for themselves in terms of our ability
to continue to grow our business not only in South Africa but in a number of
other countries in the world," said Dr. Serge Belamant, Chairman and Chief
Executive Officer of Net1. "Our acquisition of BGS has already proved to be a
strategic asset in terms of our market penetration we strive to achieve. The
current state of the global economy is, in my humble view, forcing people to
go back to basics where our technology operates in the best possible way," he
concluded.
"We maintain our outlook of 15% fundamental earnings per share growth on a
constant currency basis for fiscal 2009," said Herman Kotze, Chief Financial
Officer of Net1. "Our GAAP earnings per share growth should exceed 25% on a
constant currency basis as a result of the change in tax rates and the foreign
exchange gains on a short-term investment," he concluded.
Conference call
Net1 will host a conference call to review second quarter results on February
6, 2009, at 8:00 a.m. Eastern Standard Time. To participate in the call, dial
1-800-860-2442 (US only), 1-866-519-5086 (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.net1ueps.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 February 27, 2009.
About Net1 (www.net1ueps.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. The Company believes that it is the first company
worldwide to implement a system that can enable 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. To accomplish
this, the Company has developed and deployed the UEPS. This system uses secure
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 Net1`s system can enter into transactions at
any time with other cardholders in even the most remote areas so long as a
portable offline smart card reader is available. In addition to payments and
purchases, Net1`s system can be used for banking, health care management,
international money transfers, voting and identification.
The Company also focuses on the development and provision of secure
transaction technology, solutions and services. The Company`s core
competencies around secure online transaction processing, cryptography and
integrated circuit card (chip/smart card) technologies are principally applied
to electronic commerce transactions in the telecommunications, banking,
retail, petroleum and utilities market sectors. These technologies form the
cornerstones of the "trusted transactions" environment of Prism, a South
Africa-based subsidiary of the Company, and provide the Company with the
building blocks for developing secure end-to-end payment solutions.
In late August 2008, Net1 acquired 80.1% of BGS Smartcard System AG ("BGS"),
an Austrian company, whose core business consists of developing and
integrating smart card-based offline and online financial transaction systems.
Since 1993, BGS has implemented tailor-made smart card-based payment
solutions, focusing on emerging economies and in cooperation with banks,
enterprises and government authorities. BGS is headquartered in Vienna,
Austria, and has subsidiaries in India and Russia, and a branch office in the
Ukraine. Distributors are located in Asia, Central and South America, the
Commonwealth of Independent States and the Middle East.
Forward-Looking Statements
This announcement contains forward-looking statements that involve known and
unknown risks and uncertainties. A discussion of various factors that could
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.
Contact William Espley at Net1 Investor Relations at:
Telephone: 1-604-484-8750
Toll Free: 1-866-412-NET1 (6381)
NET 1 UEPS TECHNOLOGIES, INC.
Unaudited Condensed Consolidated Statements of Operations
Three months ended Six months ended
December 31, December 31,
2008 2007 2008 2007
(In thousands, (In thousands,
except per share except per share
data) data)
REVENUE $ 61,388 $ 68,500 $ 129,323 $ 128,759
EXPENSE
COST OF GOODS SOLD, IT 17,175 20,175 36,411 35,318
PROCESSING, SERVICING AND
SUPPORT
SELLING, GENERAL AND 15,311 17,266 33,309 33,730
ADMINISTRATION
DEPRECIATION AND AMORTIZATION 4,261 2,833 7,684 5,579
IMPAIRMENT OF GOODWILL 1,836 - 1,836 -
OPERATING INCOME 22,805 28,226 50,083 54,132
FOREIGN EXCHANGE GAIN RELATED 20,581 - 26,657 -
TO SHORT-TERM INVESTMENT
INTEREST INCOME, net 2,303 4,116 5,465 7,098
INCOME BEFORE INCOME TAXES 45,689 32,342 82,205 61,230
INCOME TAX EXPENSE 16,999 11,788 26,901 22,660
NET INCOME FROM CONTINUING 28,690 20,554 55,304 38,570
OPERATIONS BEFORE MINORITY
INTEREST AND LOSS FROM EQUITY-
ACCOUNTED INVESTMENTS
MINORITY INTEREST 702 - 762 (196)
LOSS FROM EQUITY-ACCOUNTED 226 236 536 520
INVESTMENTS
NET INCOME $ 27,762 $ 20,318 $ 54,006 $38,246
Net income per share
Basic earnings, in cents - 49.2 35.6 94.8 67.0
common stock and linked units
Diluted earnings, in cents - 49.1 35.2 94.4 66.4
common stock and linked units
NET 1 UEPS TECHNOLOGIES, INC.
Condensed Consolidated Balance Sheets
Unaudited (A)
December June 30,
31,
2008 2008
(In thousands, except
share data)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 124,656 $ 272,475
Pre-funded social welfare grants receivable 50,848 35,434
Accounts receivable, net of allowances of - 30,766 21,797
December: $157; June: $260
Finance loans receivable, net of allowances 4,113 4,301
of - December: $1,020; June: $1,007
Deferred expenditure on smart cards 89 78
Inventory 6,263 6,052
Deferred income taxes 5,327 5,597
Total current assets 222,062 345,734
LONG-TERM RECEIVABLE 150 207
PROPERTY, PLANT AND EQUIPMENT, NET OF ACCUMULATED 6,834 6,291
DEPRECIATION OF - December: $23,238; June:
$24,753
EQUITY-ACCOUNTED INVESTMENTS 2,603 2,685
GOODWILL 106,708 76,938
INTANGIBLE ASSETS, NET OF ACCUMULATED 79,374 22,216
AMORTIZATION OF -
December: $20,101; June: $16,486
TOTAL ASSETS 417,731 454,071
LIABILITIES
CURRENT LIABILITIES
Bank overdraft 101 -
Accounts payable 3,411 4,909
Other payables 46,660 57,432
Income taxes payable 15,090 14,162
Total current liabilities 65,262 76,503
DEFERRED INCOME TAXES 33,929 33,474
OTHER LONG-TERM LIABILITIES, including minority 3,994 3,766
interest loans
COMMITMENTS AND CONTINGENCIES - -
TOTAL LIABILITIES 103,185 113,743
SHAREHOLDERS` EQUITY
COMMON STOCK
Authorized: 200,000,000 with $0.001 par
value;
Issued shares - December: 55,673,186; June: 58 52
53,423,552
SPECIAL CONVERTIBLE PREFERRED STOCK
Authorized: 50,000,000 with $0.001 par value;
Issued and outstanding shares - December: 0; - 5
June: 4,882,429
B CLASS PREFERENCE SHARES
Authorized: 330,000,000 with $0.001 par
value;
Issued and outstanding shares (net of shares - 6
held by Net1) - December: 0; June: 35,975,818
ADDITIONAL PAID-IN-CAPITAL 122,975 119,283
TREASURY SHARES, AT COST: December: 2,726,409; (32,707 (7,950)
June: 306,269 )
ACCUMULATED OTHER COMPREHENSIVE LOSS (99,138 (37,820)
)
RETAINED EARNINGS 320,758 266,752
TOTAL SHAREHOLDERS` EQUITY 311,946 340,328
TOTAL LIABILITIES AND SHAREHOLDERS` EQUITY $ 417,731 $ 454,071
(A) - Derived from audited financial statements
NET 1 UEPS TECHNOLOGIES, INC.
Unaudited Condensed Consolidated Statements of Cash Flows
Three months ended Six months ended
December 31, December 31,
2008 2007 2008 2007
(In thousands) (In thousands)
Cash flows from operating
activities
Net income $ 27,762 $ 20,318 $ 54,006 $ 38,246
Depreciation and amortization 4,261 2,833 7,684 5,579
Impairment of goodwill 1,836 - 1,836 -
Loss from equity-accounted 226 236 536 520
investments
Fair value adjustment related 650 (169) 614 (242)
to financial liabilities
Fair value of FAS 133 (3,122) (17) (3,058) (10)
derivative adjustments
Unrealized foreign exchange 5,061 - (1,015) -
reversal (gain) related to
short-term investment
Interest payable (408) 124 231 241
Profit on disposal of (1) (76) - (86)
property, plant and equipment
Minority interest 702 - 762 (196)
Stock-based compensation 1,346 911 2,551 1,752
charge
Facility fee amortized 352 - 1,100 -
Decrease (Increase) in 8,350 (23,786 (37,791) (18,248
accounts receivable, pre- ) )
funded social welfare grants
receivable and finance loans
receivable
(Increase) Decrease in (4) 166 (27) 260
deferred expenditure on smart
cards
Decrease (Increase) in 511 186 294 (1,579)
inventory
(Decrease) Increase in (3,174) (12,106 (17,589) 313
accounts payable and other )
payables
Increase (Decrease) in taxes 775 (7,128) 4,184 (6,632)
payable
Increase (Decrease) in 751 2,939 (1,419) 4,756
deferred taxes
Net cash provided by (used 45,874 (15,569 12,899 24,674
in) operating activities )
Cash flows from investing
activities
Capital expenditures (439) (1,205) (3,283) (1,876)
Proceeds from disposal of 1 77 2 118
property, plant and equipment
Acquisition of BGS, net of (458) - (95,786) -
cash acquired
Acquisition of shares in (50) - (600) -
equity-accounted investments
Net cash used in investing (946) (1,128) (99,667) (1,758)
activities
Cash flows from financing
activities
Proceeds from issue of share - - 155 150
capital, net of share issue
expenses
Treasury stock acquired (24,752) - (24,752) -
Proceeds from short-term loan - - 110,000 -
facility
Repayment of short-term loan (110,000 - (110,000 -
facility ) )
Payment of facility fee - - (1,100) -
Proceeds from bank overdrafts 94 1,453 95 1,462
Repayment of bank overdraft - (1,426) - (1,442)
Net (used in) cash provided (134,658 27 (25,602) 170
by financing activities )
Effect of exchange rate (31,538) 1,889 (35,449) 5,928
changes on cash
Net (decrease) increase in (121,268 (14,781 (147,819 29,014
cash and cash equivalents ) ) )
Cash and cash equivalents - 245,924 215,522 272,475 171,727
beginning of period
Cash and cash equivalents - $ 124,656 $ 200,741 $ 124,656 $ 200,741
end of period
Net 1 UEPS Technologies, Inc.
Attachment A
Key metrics and statistics at and for the three months ended December 31, 2008
and 2007 and September 30, 2008:
Three months ended December 31, 2008 and 2007 and September 30, 2008
Key statement of operations data, Q2 `09 Q2 `08 Q1 `09
in `000, except EPS
USD USD USD
Revenue $61,388 $68,500 $67,935
Operating income 22,805 28,226 27,278
Income tax expense 16,999 11,788 9,902
Net income $27,762 $20,318 $26,244
Earnings per share,
Basic (cents) 49 36 46
Diluted (cents) 49 35 45
Fundamental earnings per share,
Basic (cents) 36 39 40
Key segmental data, in `000, except
margins
Revenue:
Transaction-based activities $32,820 $39,991 $40,344
Smart card accounts 6,711 9,637 8,570
Financial services 1,430 2,135 1,784
Hardware, software and related 16,737 17,237
technology sales 20,427
Total consolidated revenue $61,388 $68,500 $67,935
Consolidated operating income
(loss):
Transaction-based activities $17,653 $21,381 $21,638
Smart card accounts 3,050 4,380 3,895
Financial services (1,570) 458 327
Hardware, software and related 5,493 2,265 4,134
technology sales
Corporate/ Eliminations (1,821) (258) (2,716)
Total operating income $22,805 $28,226 $27,278
Operating income margin (%)
Transaction-based activities 54% 53% 54%
Smart card accounts 45% 45% 45%
Financial services (110)% 21% 18%
Hardware, software and related 27% 14% 24%
technology sales
Overall operating margin 37% 41% 40%
Dec 31, Jun 30,
2008 2008 Change
Key balance sheet data, in `000
Cash and cash equivalents $124,656 $272,475 (54)%
Total current assets 222,062 345,734 (36)%
Total assets 417,731 454,071 (8)%
Total current liabilities 65,262 76,503 (15)%
Total shareholders` equity $311,946 $340,328 (8)%
Change - actual Change - constant
exchange rate(1)
Key statement of operations data, Q2 `09 Q2 `09 Q2 `09 Q2 `09
in `000, except EPS vs vs vs vs
Q2 `08 Q1 `09 Q2 `08 Q1 `09
Revenue (10)% (10)% 30% 14%
Operating income (19)% (16)% 17% 5%
Income tax expense 44% 72% 109% 116%
Net income 37% 6% 98% 33%
Earnings per share,
Basic (cents) 36% 7% 97% 34%
Diluted (cents) 40% 9% 103% 37%
Fundamental earnings per share,
Basic (cents) (8)% (10)% 34% 13%
Key segmental data, in `000, except
margins
Revenue:
Transaction-based activities (18)% (19)% 19% 2%
Smart card accounts (30)% (22)% 1% (1)%
Financial services (33)% (20)% (3)% 1%
Hardware, software and related 22% 19% 77% 49%
technology sales
Total consolidated revenue (10)% (10)% 30% 14%
Consolidated operating income
(loss):
Transaction-based activities (17)% (18)% 20% 3%
Smart card accounts (30)% (22)% 1% (1)%
Financial services (443)% (580)% (597)% (705)%
Hardware, software and related 143% 33% 252% 67%
technology sales
Corporate/ Eliminations 606% (33)% 924% (16)%
Total operating income (19)% (16)% 17% 5%
(1) - This information shows what the change in these items would have
been if the USD/ ZAR exchange rate that prevailed during the second
quarter of fiscal 2009 also prevailed during the second quarter of
fiscal 2008 and the first quarter of fiscal 2009.
Three months ended December 31, 2008 and 2007 and September 30, 2008
(continued)
Change
Additional Q2 `09 Q2 `08 Q1 `09 Q2 Q2
information: `09 `09
vs vs
Q2 Q1
`08 `09
Transaction-based
activities:
Total number of
grants paid:
KwaZulu-Natal 5,277,936 5,063,374 5,230,041 4% 1%
Limpopo 2,967,229 2,948,717 2,958,456 1% -%
North West 1,321,175 1,230,354 1,385,537 7% (5)%
Northern Cape 504,563 498,877 497,726 1% 1%
Eastern Cape 2,078,602 2,155,433 2,058,236 (4)% 1%
12,149,505 11,896,755 12,129,996 2% -%
Average revenue per ZAR ZAR ZAR
grant paid:
KwaZulu-Natal 27.64 22.11 23.89 25% 16%
Limpopo 18.09 17.39 18.15 4% -%
North West 24.31 21.43 25.68 13% (5)%
Northern Cape 23.60 18.37 24.03 28% (2)%
Eastern Cape 16.49 16.11 16.52 2% -%
UEPS merchant
acquiring system:
Terminals installed 4,182 4,304 4,170 (3)% -%
at period end
Number of 2,385 2,532 2,382 (6)% -%
participating retail
locations at period
end
Value of 2,550,082 1,757,836 2,486,912 45% 3%
transactions
processed through
POS devices during
the quarter (in ZAR
`000)
Value of 2,496,496 1,870,595 2,288,288 33% 9%
transactions
processed through
POS devices during
the completed pay
cycles for the
quarter (in ZAR
`000)
Average number of 1,050 799 1,061 31% (1)%
grants processed per
terminal during the
quarter
Average number of 1,036 851 983 22% 5%
grants processed per
terminal during the
completed pay cycles
for the quarter
EasyPay transaction
fees:
Number of 155,697,664 135,283,353 135,240,966 15% 15%
transactions
processed
Average fee per 0.21 0.21 0.22 -% (5)%
transaction (in ZAR)
Three months ended December 31, 2008 and 2007 and September 30, 2008
(continued)
Change
Q2 `09 Q2 `08 Q1 `09 Q2 Q2
`09 `09
vs vs
Q2 Q1
`08 `09
Smart card accounts:
Total number of 4,061,100 3,976,684 4,039,359 2% 1%
smart card accounts
Hardware, software
and related
technology sales:
Ad hoc significant
hardware sales (USD
`000)
Nedbank hardware 100 2,000 2,300 (95)% (96)%
Ghana - in terms of 3,400 5,600 3,900 (39)% (13)%
contract
Financial services:
(USD `000)
Traditional
microlending:
Finance loans 2,368 5,336 2,595 (56)% (9)%
receivable - gross
Allowance for (1,020) (3,153) (1,086) (68)% (6)%
doubtful finance
loans receivable
Finance loans 1,348 2,183 1,509 (38)% (11)%
receivable - net
UEPS-based lending:
Finance loans 2,765 4,086 2,605 (32)% 6%
receivable -net and
gross (i.e., no
provisions)
Earnings (Loss) from
equity-accounted
investments: (USD
`000)
Beginning of period (2,699) (2,112) (2,611)
Equity-accounted (226) (236) (310)
earnings (loss)
Equity-accounted (9) (6) 6
earnings (loss) -
SmartSwitch
Namibia(1)
Equity-accounted 5 (31) (35)
earnings (loss) -
SmartSwitch
Botswana(1)
Equity-accounted (198) (168) (246)
(loss) - VTU
Colombia
Equity-accounted (24) (31) (35)
(loss) - VinaPay
Foreign currency 311 (4) 222
adjustment
End of period (2,614) (2,352) (2,699)
(1) - includes the elimination of unrealized net income
Key metrics and statistics at and for the six months ended December 31, 2008
and 2007:
Six months ended December 31, 2008 and 2007
Six months ended Change Year ended
Dec 31, June 30,
Constant
2008 2007 Exchange 2008
USD USD Actual Rate (1) USD
Key statement of
operations data, in
`000, except EPS
Revenue $129,323 $128,759 -% 27% $254,056
Operating income 50,083 54,132 (7)% 17% 110,386
Income tax expense 26,901 22,660 19% 50% 39,192
Net income $54,006 $38,246 41% 79% $86,695
Earnings per share,
Basic (cents) 95 67 42% 80% 152
Diluted (cents) 94 66 42% 80% 150
Fundamental earnings
per share,
Basic (cents) 75 73 3% 30% 155
Key segmental data,
in `000, except
margins
Revenue:
Transaction-based $73,164 $78,155 (6)% 19% $153,444
activities
Smart card accounts 15,281 18,773 (19)% 3% 35,914
Financial services 3,214 4,318 (26)% (6)% 8,251
Hardware, software 37,664 27,513 37% 73% 56,447
and related
technology sales
Total consolidated $129,323 $128,759 -% 27% $254,056
revenue
Consolidated
operating income
(loss):
Transaction-based $39,291 $41,970 (6)% 19% $84,229
activities
Smart card accounts 6,945 8,532 (19)% 3% 16,325
Financial services (1,243) 904 (238)% (274)% 1,935
Hardware, software 9,627 4,205 129% 190% 11,708
and related
technology sales
Corporate/ (4,537) (1,479) 207% 289% (3,811)
Eliminations
Total operating $50,083 $54,132 (7)% 17% $110,386
income
Operating income
margin (%)
Transaction-based 54% 54% 55%
activities
Smart card accounts 45% 45% 45%
Financial services (39)% 21% 23%
Hardware, software 26% 15% 21%
and related
technology sales
Overall operating 39% 42% 43%
margin
Dec 31, June 30,
2008 2008
Key balance sheet
data, in `000
Cash and cash $124,656 $272,475 (54)%
equivalents
Total current assets 222,062 345,734 (36)%
Total assets 417,731 454,071 (8)%
Total current 65,262 76,503 (15)%
liabilities
Total shareholders` $311,946 $340,328 (8)%
equity
(1) - This information shows what the change in these items would have
been if the USD/ ZAR exchange rate that prevailed during the first half
of fiscal 2009 also prevailed during the first half of fiscal 2008.
Six months ended December 31, 2008 and 2007 (continued)
Six months ended Chan Year ended
Dec 31, ge June 30,
2008 2007 2008
Additional information:
Transaction-based
activities:
Total number of grants
paid:
KwaZulu-Natal 10,507,977 10,103,529 4% 20,337,526
Limpopo 5,925,685 5,883,827 1% 11,791,095
North West 2,706,712 2,449,413 11% 4,984,479
Northern Cape 1,002,289 994,977 1% 1,986,525
Eastern Cape 4,136,838 4,293,408 4% 8,491,929
24,279,501 23,725,154 2% 47,591,554
Average revenue per ZAR ZAR ZAR
grant paid:
KwaZulu-Natal 25.77 21.57 19% 22.19
Limpopo 18.12 17.08 6% 17.76
North West 25.01 21.26 18% 21.79
Northern Cape 23.81 18.72 27% 20.44
Eastern Cape 16.50 15.57 6% 16.05
UEPS merchant acquiring
system:
Terminals installed at 4,182 4,304 (3)% 4,394
period end
Number of participating 2,385 2,532 (6)% 2,454
retail locations at
period end
Value of transactions 2,550,082 1,757,836 45% 2,243,592
processed through POS
devices during the
quarter (in ZAR `000)
Value of transactions 2,496,496 1,870,595 33% 2,178,596
processed through POS
devices during the
completed pay cycles for
the quarter (in ZAR
`000)
Average number of grants 1,050 799 31% 965
processed per terminal
during the quarter
Average number of grants 1,036 851 22% 936
processed per terminal
during the completed pay
cycles for the quarter
EasyPay transaction
fees:
Number of transactions 290,938,630 254,316,252 14% 516,849,006
processed
Average fee per 0.21 0.21 - 0.21
transaction (in ZAR)
Six months ended December 31, 2008 and 2007 (continued)
Six months ended Change Year ended
Dec 31, June 30,
2008 2007 2008
Smart card accounts:
Total number of smart 4,061,100 3,976,684 2% 4,022,193
card accounts
Hardware, software and
related technology
sales:
Ad hoc significant
hardware sales (USD
`000)
Nedbank hardware 2,500 2,000 25% 3,244
Ghanaian National Switch 7,300 6,500 12% 15,800
and Smart Card Payment
System Contract
Financial services: (USD
`000)
Traditional
microlending:
Finance loans receivable 2,368 5,336 (56)% 2,864
- gross
Allowance for doubtful (1,020) (3,153) (68)% (1,007)
finance loans receivable
Finance loans receivable 1,348 2,183 (38)% 1,857
- net
UEPS-based lending:
Finance loans receivable 2,765 4,086 (32)% 2,444
-net and gross (i.e., no
provisions)
Earnings (Loss) from
equity accounted
investments: (USD `000)
Beginning of period (2,611) (1,774) (1,774)
Equity-accounted (536) (520) (1,036)
earnings (loss)
Equity-accounted (3) (12) 15
earnings (loss) -
SmartSwitch Namibia(1)
Equity-accounted (30) (123) (97)
earnings (loss) -
SmartSwitch Botswana(1)
Equity-accounted (loss) (444) (327) (792)
- VTU Colombia
Equity-accounted (loss) (59) (58) (162)
- VinaPay
Foreign currency 533 (58) 199
adjustment
End of period (2,614) (2,352) (2,611)
(1) - Includes the elimination of unrealized net income
Net 1 UEPS Technologies, Inc.
Attachment B
Reconciliation of GAAP results to fundamental results:
Three months ended December 31, 2008 and 2007
Net Income EPS, basic Net Income EPS, basic
(USD `000) (USD (ZAR `000) (ZAR
cents) cents)
2008 2007 2008 2007 2008 2007 2008 2007
GAAP 27,762 20,318 49 36 272,875 137,686 483 241
Amortization 2,276 936 22,371 6,344
of intangible
assets(1)
Customer 2,412 388 23,713 2,630
relationships
Software and 676 980 6,642 6,642
unpatented
technology
Trademarks 69 100 679 679
Deferred (881) (532) (8,663) (3,607)
tax benefit
Stock-based 1,346 911 13,230 6,173
charge(2)
JSE listing 84 - 826 -
costs
Facility fee 352 - 3,460 -
Foreign (13,470 - (132,397 -
exchange gain ) )
related to a
short-term
investment,
net of tax
of $4,654
Impairment of 1,836 - 18,046 -
Goodwill
Fundamental 20,186 22,165 36 39 198,411 150,203 351 263
(1) Amortization of Prism, EasyPay and BGS intangibles, net of deferred
tax benefit:
(2) Includes stock-based compensation charges related to options and non-
vested stock awards.
Six months ended December 31, 2008 and 2007
Net Income EPS, basic Net income EPS,
(USD`000) (USD (ZAR`000) basic
cents) (ZAR
cents)
2008 2007 2008 2007 2008 2007 2008 2007
GAAP 54,006 38,246 95 67 475,302 265,603 835 465
Amortization 3,749 1,828 32,995 12,689
of intangible
assets(1)
Customer 3,609 758 31,759 5,260
relationships
Software and 1,509 1,913 13,284 13,285
unpatented
technology
Trademarks 154 196 1,358 1,358
Deferred tax (1,523) (1,039 (13,406) (7,214)
benefit )
Stock-based 2,551 1,752 22,451 12,167
charge(2)
Tax rate (3,456) - (26,524) -
change
JSE listing 495 - 4,356 -
costs
Facility fee 1,100 - 9,681 -
Foreign (17,447 - (153,549 -
exchange gain ) )
related to a
short-term
investment,
net of tax of
$6,028
Impairment of 1,836 - 16,158 -
goodwill
Fundamental 42,834 41,826 75 73 380,870 290,459 669 509
(1) Amortization of Prism, EasyPay and BGS intangibles, net of deferred
tax benefit:
(2) Includes stock-based compensation charges related to options and non-
vested stock awards.
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:
Three months ended December 31, 2008 and 2007
2008 2007
Net income (USD`000) 27,762 20,318
Adjustments:
Impairment of goodwill 1,836 -
Profit on sale of property, plant and (1) (76)
equipment (USD`000)
Tax effects on above (USD`000) - 28
Net income used to calculate headline 29,597 20,270
earnings (USD`000)
Weighted average number of shares used to 56,470 57,137
calculate net income per share basic earnings
and headline earnings per share basic
earnings (`000)
Weighted average number of shares used to 56,594 57,731
calculate net income per share diluted
earnings and headline earnings per share
diluted earnings (`000)
Headline earnings per share:
Basic earnings - common stock and linked 52 35
units, in US cents
Diluted earnings - common stock and linked 52 35
units, in US cents
Six months ended December 31, 2008 and 2007
2008 2007
Net income (USD`000) 54,006 38,246
Adjustments:
Impairment of goodwill 1,836 -
Profit on sale of property, plant and - (86)
equipment (USD`000)
Tax effects on above (USD`000) - 32
Net income used to calculate headline 55,842 38,192
earnings (USD`000)
Weighted average number of shares used to 56,952 57,123
calculate net income per share basic earnings
and headline earnings per share basic
earnings (`000)
Weighted average number of shares used to 57,180 57,592
calculate net income per share diluted
earnings and headline earnings per share
diluted earnings (`000)
Headline earnings per share:
Basic earnings - common stock and linked 98 67
units, in US cents
Diluted earnings - common stock and linked 98 66
units, in US cents
Net 1 UEPS Technologies, Inc.
Attachment D
FREQUENTLY ASKED QUESTIONS
1. How does the cancellation of the SASSA tender influence the current
contracts?
On November 3, 2008, we received the final decision in respect of the Payment
Service Tender from the CEO of the South African Social Security Agency
("SASSA"), advising us that the CEO has decided to: (i) make no award of
tenders submitted in response to SASSA Tender 19/06/BS and to terminate the
procurement process; and (ii) defer a decision about commencing a fresh tender
process for the provision of a social assistance grants payment service. The
CEO cited a number of defects in the original request for proposals published
by SASSA and in the bid evaluation process.
Our current contracts expire on March 31, 2009. We believe that SASSA`s
statement to defer a decision about commencing a fresh tender process will
necessitate a further extension of our current contracts. We are currently in
discussions with SASSA to determine the extent, terms and conditions of any
potential contract extensions. Until the exact terms and conditions of these
potential contract extensions are formalized, we can not quantify the
financial or business impact of any variations to our current contractual
terms.
2. How does the cancellation of the tender influence your strategic planning?
As discussed above, SASSA may decide to extend our current contracts on a
short-term renewal basis. We have the capacity to operate this business
without compromising our high service levels regardless of the period, or
frequency, of any extension periods granted. Our medium- and long-term
strategic goals are not dependent on our social welfare payments business. Our
strategic planning is focused on the globalization of our technology by
following a disciplined approach to new markets, through careful evaluation of
new opportunities. Where we believe it makes sense, we will use partnerships
or make acquisitions to accelerate our entry into new markets.
Our technology is unique and unlike any other payment system, resulting in
sales cycles that are unpredictable and often stretch over a period of years.
It is therefore particularly difficult to provide clear short term visibility
on our international prospects and the specific product, application or
business model that will ultimately be implemented in a specific country or
territory as a myriad of factors need to be considered, such as the corporate
and regulatory environment, central bank requirements, tax regimes,
compilation of business plans, etc. We have dedicated sales and marketing
teams who focus on our specific target regions of Africa, the Middle East and
Central and Eastern Europe and we plan to introduce dedicated teams for South
America and Asia - Pacific Rim in the near future. We have expanded our
strategic planning to include the BGS` activities and prospects, with
particular emphasis on significantly expanding the application of our
technology in the Russian Federation and the CIS Republics with our current
partners as well as other interested organizations. We recently completed a
comprehensive training program of the BGS business development team to ensure
that their activities are aligned with the Net1 group strategy.
3. What was the rationale for acquiring BGS?
BGS is an Austrian company whose core business consists of developing and
integrating smart card-based offline and online financial transaction systems.
Since 1993, BGS has implemented tailor-made smart card-based payment
solutions, focusing on emerging economies and in cooperation with banks,
enterprises and government authorities. BGS has provided systems to customers
in Russia, Ukraine, Uzbekistan, India and Oman. BGS` system, Dual Universal
Electronic Transactions ("DUET"), was developed by BGS as a derivative of the
first version of our UEPS technology that we licensed to BGS in 1993. BGS`
largest customer is Sberbank, the largest financial institution in Russia,
which owns the remaining 19.9% of BGS.
BGS is headquartered in Vienna, Austria, and has subsidiaries in India and
Russia, and a branch office in the Ukraine. Distributors are located in Asia,
Central and South America, the Commonwealth of Independent States and the
Middle East. BGS employs more than 100 people worldwide, including 75 staff
members in the research and development and the technical division. BGS`
approach is to offer its customers an adaptive and flexible turnkey solution
which encompasses modular smart card and back-office solutions, hardware,
consulting services, product customization and integration, installation,
system implementation and technical support and training.
We believe that the acquisition of BGS offers numerous potential strategic
benefits, including the following:
- Increasing Net1`s revenues from providing its financial services and value-
added products to a new cardholder base. BGS has historically employed a
business model which focused on selling its product offering into various
countries. In contrast, Net1`s service-based business model focuses on
generating continuing revenues from its cardholder base through transaction-
based fees, financial services and value-added products. We believe that the
geographical footprint of BGS is now large enough to allow us to overlay our
service-based model onto the various DUET systems operating in Russia and
other countries, thereby creating new revenue streams for BGS and system
operators.
- Enhancing Net1`s product offering by leveraging technology platforms and
IT development resources. We believe that our technological leadership in
fields such as biometric identification and in the integration of its UEPS
technology with GSM will allow us to create new business opportunities for BGS
such as national identification, voting and welfare distribution systems and
cell phone-based payment solutions. Further, the addition of BGS` skilled
human resources in the information technology area should greatly assist us in
the ongoing development of our technologies and maintenance of our existing
systems.
- Increasing the depth of the management team with the addition of
experienced executives. Leonid Delberg and Richard Schweger have led BGS since
1997 and have over 25 years of combined experience in the smart card industry.
Messrs. Delberg and Schweger will continue as senior executives of BGS and
oversee its expansion and integration with Net1. We believe that the expertise
and experience of BGS` senior management will greatly assist us in our global
expansion initiatives.
- Accelerating the rollout of UEPS in Russia and other new territories.
There is little geographical overlap in our and BGS` operations and thus, the
acquisition offers us the opportunity to establish relationships in countries
where we believe there are exciting opportunities for the implementation of
our technology but where we have minimal current relationships. We believe
that having a local partner is important to the success of international
implementation of our systems. We further believe that Sberbank, through its
leading market position in Russia, can offer Net1 its extensive business
network to implement our complete suite of products there and will be
motivated to do so by virtue of its continued participation as a shareholder
in BGS.
4. How was the acquisition of BGS financed?
We obtained a $110 million six-month bank loan facility to fund the cash
portion of the purchase price for the BGS acquisition. We were entitled to
settle the full facility at any time during the six-month period without
incurring a prepayment penalty. During the six months ended December 31, 2008,
we utilized approximately $105 million of this facility to pay the cash
portion of the purchase price, the $1.1 million facility fee and transaction-
related costs. The interest rate charged on this facility was LIBOR plus
2.50%.
We paid the lender an upfront facility fee of $1.1 million and we have
amortized the facility fee over the period that the loan was outstanding.
Included in interest income, net for the six months ended December 30, 2008,
is $1.1 million related to the facility.
On October 16, 2008, the Company used internally generated funds to repay the
loan in full and all collateral security arrangements were terminated. Our
secondary listing on the JSE provided us with the ability to utilize a
substantial portion of our South African cash reserves to settle the loan.
5. What does the foreign exchange gain of $26.7 million relate to?
The Company entered into an asset swap arrangement (in the form of a $110
million 32-day call account instrument) in order to facilitate the short-term
loan facility required for the BGS acquisition, however this asset swap
arrangement was not linked to the loan facility and did not require redemption
on the same date as the repayment of the loan facility. The Company earned
interest at a rate of one month LIBOR plus 0.25% on this instrument. The
Company gave a call notice to the obligor on September 10, 2008, and the
capital of $110 million (or ZAR 1,100.7 million) and interest on this
instrument was repaid on October 16, 2008. The Company has realized a foreign
exchange gain of approximately $20.6 million and $26.7 million for the three
and six months ended December 31, 2008.
6. Why did Net1 obtain a secondary listing on the JSE?
The main purposes for our listing on the JSE were to:
- enhance South African investors` awareness of us, thereby enlarging our
potential investor base and increasing trade in our shares;
- provide ourselves with an additional source from which capital to
facilitate growth can be obtained;
- optimize and simplify our capital structure by eliminating the linked
units;
- enable us to externalize our South African reserves when required;
- externalize our South African reserves without incurring significant
leakage;
- facilitate direct investment in our common stock by South African
residents and the investors utilizing the trading platform operated by the
JSE; and
- create additional liquidity for current South African investors.
As a result of our listing on the JSE our shareholders are now able to trade
their shares of common stock on the Nasdaq Global Select Market, or Nasdaq,
and the JSE. During the first half of fiscal 2009, we incurred expenses of
approximately $0.5 million related to our inward listing on the JSE.
7. Has the volatility in the global equity and credit markets affected your
business prospects?
No. We have sufficient cash reserves and financing arrangements to continue
our current business activities. We do not share the prevailing negative
global sentiment towards emerging markets as our technology is focused on
these territories and remains in demand, especially when the weaknesses of
traditional banking systems have become patently clear. Significant weakness
in our share price caused by the prevailing market conditions could, however,
have an impact on our ability to pursue certain acquisitions that may
accelerate our global expansion.
8. How do you forecast growth in the beneficiary numbers in your social
welfare payment business?
There are no official beneficiary growth forecasts. We forecast beneficiary
numbers using the budgeted expenditure on social welfare grants provided in
the South African government`s budget, taking into account that the amount
budgeted for is a function of beneficiary numbers, as well as the average
amount paid to each beneficiary class. Based on past experience and an
analysis of the information at hand, we anticipate beneficiary growth of 3% to
6% per annum. The growth in beneficiary numbers is fairly "lumpy" and is
influenced by factors such as the government`s marketing and registration
programs and the time taken by SASSA to process new grant applications.
9. What is the status of the wage payment system implementation with Grindrod
Bank?
We officially launched the wage payment system in the KwaZulu-Natal province
on May 12, 2008 and we have successfully implemented several systems with
smaller employers in the area, mainly in the agricultural sector. During the
first quarter of fiscal 2009, we entered into an agreement with our first
major corporate customer to utilize the wage payment system. Our customer is
the largest provider of security and guarding services in South Africa and
employs approximately 20,000 people. We commenced with the registration
process during the second quarter of fiscal 2009 and we expect to complete the
enrollment of all employees by the end of the third quarter of fiscal 2009.
10. What is the size of the market opportunity for the wage payment system and
how successful will Net1 and Grindrod Bank be in penetrating this market?
The target markets for the wage payment system are the un-banked and under-
banked wage earners in South Africa, estimated at five million people. These
wage earners are typically paid in cash on a weekly, bi-weekly or monthly
basis and have all the risks associated with cash payments, but none of the
benefits associated with having a formal bank account. Net1 and Grindrod Bank
plan to offer these wage earners a UEPS smart card that will allow the card
holder to receive payment, transact and access other financial services in a
secure, cost-effective way.
We market the wage payment system to medium and large employers and to trade
unions. The value proposition presented to employers focuses on the following
key features:
- Safety - Security risks associated with cash transportation and short-
payment disputes are eliminated;
- Cost-effectiveness - Our wage payment solution is significantly cheaper
than the current cost to employers of preparing and distributing cash pay
packets;
- Improved productivity - Our solution obviates the need to set aside
valuable production time to physically pay employees; and
- Convenience - With our system, wages can be distributed off-line at any
time, and financial products, such as cash advances, can be offered to the
employee without placing any administrative burden on the employer.
Our value proposition to unions and employees has the following key elements:
- Safety - The personal safety risk of carrying cash is eliminated;
- Security - Our smart cards can only be used in conjunction with biometric
verification and are completely loss tolerant - no money is lost if the card
is lost or stolen;
- Convenience - Our cards can be used at any participating retailer or
service provider at any time. Card holders can obtain cash from any
participating retailer, eliminating the need to search for an available ATM;
- Cost effectiveness - Our solution is significantly cheaper than any other
bank product, as we recover our fees mainly from employers, merchants and
service providers; and
- Access to credible and affordable facilities, such as money transfers,
loans, interest paying savings, life insurance and third party payments.
11. Can you provide an update on the Ghana contract?
During the first half of fiscal 2009 we continued with the delivery of
hardware including POS devices and the remaining smart cards under our
contract with the Bank of Ghana. In addition, we commenced delivery of smart
cards and ATMs under additional purchase orders we received. During the first
half of fiscal 2009 we delivered hardware, including smart cards and
terminals, to the Bank of Ghana and recognized revenue of approximately $7.3
million (ZAR 63.4 million).
12. What is the status of the UEPS deployment in Iraq?
The first UEPS transaction was performed in August 2008, in Baghdad, Iraq,
during the official launch of the UEPS smart card technology with the two
state banks that are part of the consortium to which we are providing a
customized UEPS banking and payment system. Our first project in Iraq is a
pilot involving 100,000 beneficiaries. The pilot calls for implementation of
our UEPS technology across selected bank branches and will enable the
distribution and payment of government grants to war victims and martyrdom
beneficiaries, as well as salary and wage distribution and payment to
employees of the two banks. Approximately 40,000 beneficiaries have been
registered and issued with UEPS cards to date.
In December 2008 we received an order for an additional 800,000 smart cards to
be issued to war victim beneficiaries and pension payment recipients. This
additional order follows the recent order of 200,000 smart cards received
during October 2008. The total cards ordered from Net1 to date amount to 1.1
million. Delivery of the 1 million cards will be 200,000 per month between
December 2008 and May 2009. Completion of cardholder registration is
anticipated for June 2009.
We expect to generate revenues in the third quarter of fiscal 2009 from the
additional sale of smart cards and license fees during the first quarter of
fiscal 2010.
13. What is VTU and how does the revenue model work?
VTU, or Virtual Top Up, facilitates mobile phone-based pre-paid airtime
vending. The VTU technology enables prepaid cell users to purchase additional
airtime simply, securely and conveniently through the distribution of airtime
value from a vendor`s cellular handset to that of the customer, as opposed to
through the use of a voucher. We derive revenue from the sale of VTU licenses
to mobile operators and we have recently established VTU businesses in
Colombia and Vietnam, where we are minority shareholders in companies that
provide a VTU service to prepaid cell phone users. These businesses generate
revenue by charging a percentage of the value of the airtime distributed
through VTU.
14. What are your new patents for mobile payments all about?
Our latest patents incorporate our UEPS and SIM card expertise into a system
that will seamlessly bridge mobile phones to existing payment infrastructures
such as ATMs, POS devices, the Internet and voice channels. The application of
these patents will allow any mobile phone user to effect payments that are
generally referred to as "card not present" payments completely securely,
through the utilization of a once off, disposable, virtual credit or debit
card. We are in the process of establishing an office in Dallas, Texas that
will focus on the marketing of this technology.
15. What is the "pre-funded social welfare grant receivable" line item on the
balance sheet?
We have a unique cash flow cycle due to our obligations to pre-fund the
payments of social welfare grants in the KwaZulu-Natal and Eastern Cape
provinces. We provide the funds required for the grant payments on behalf of
these provincial governments from our own cash resources and are reimbursed
within two weeks by the KwaZulu-Natal and Eastern Cape governments, thus
exposing ourselves to these provinces` credit risk. These obligations result
in a peak funding requirement, on a monthly basis, of approximately $35.9
million (ZAR 340 million) for each of the KwaZulu-Natal and Eastern Cape
contracts. The funding requirements are at peak levels for the first three
weeks of every month during the year. In addition, when grants are paid at
merchant locations before the start of the payment service at pay points we
are required to prefund these payments to the merchants distributing the
grants on our behalf. We typically reimburse these merchants within 48 hours
after they distribute the grants to the social welfare beneficiaries, however,
the provincial governments reimburse the amount due to us within two weeks
after the distribution date. This practice results in a significant net cash
outflow at the end of a month, and a quarter as the payment service generally
commences in the last few days of the month preceding new payment cycle month
(for instance, for the last two years, the January payment service commenced
in the last week of December at merchant locations and in January at pay
points).
The pre-funded social welfare grant receivable line also includes funding
provided to certain merchants participating in our merchant acquiring system.
This funding is provided in order to provide liquidity during the peak payment
periods of the month (usually the first week of the pay cycle) because the
payment of social welfare grants on our behalf places a burden on the
merchant`s cash resources. In cases where the merchant is not provided pre-
funding during the payment cycle it is reimbursed within 48 hours of the
payment of the social welfare grant on our behalf. The amount paid as social
welfare grants by the merchants on our behalf are available almost immediately
from the provincial governments in the Limpopo, North West and Northern Cape
provinces and within two weeks from the KwaZulu-Natal and Eastern Cape
provincial governments because we pre-fund these two provinces.
The actual quantum of Net1`s cash reserves should be evaluated by regarding
this highly liquid, very short-term receivable as a near-cash equivalent.
16. How are you growing the management team?
During the last year, we made significant progress in strengthening the Net1
management team. Also, our recent acquisition of BGS provides us with two
executives with long experience in the smart card industry and additional IT
professionals to strengthen the Net1 research and development environment.
We have appointed three senior managers to assist Brenda Stewart, our senior
vice-president of marketing and sales with project management, marketing and
implementation activities on a global basis. We have also appointed a senior
manager to oversee the established activities of our international and
SmartSwitch operations and we have created an investment forum to consider all
aspects of prospective investments in new territories.
Our finance, administration, human resources, compliance and treasury
functions are growing continuously to provide a high level of support to the
group.
We are actively seeking a new vice president-investor relations to address
shareholder queries and improve our investor relations function.
Finally, we have restructured and strengthened our operations teams to ensure
ongoing effective management of our South African social welfare and wage
payment activities.
We are committed to growing the Net1 management team to ensure that we are
able to capitalize on the myriad of opportunities we are presented with on an
ongoing basis.
17. You are highly cash generative and show a strong cash balance on your
balance sheet, why do you not return some of this money to shareholders?
We have not paid any dividends on our shares of common stock during our last
two fiscal years and presently intend to retain future earnings to finance the
expansion of the business. We do not anticipate paying any cash dividends in
the foreseeable future. The future dividend policy will depend on our
earnings, capital requirements, expansion plans, financial condition and other
relevant factors. Our Board has authorized a $50 million share repurchase
program. During the second quarter of fiscal 2009, we used approximately
$24.7 million of this authorization. Whether or not we use the remaining
authorization will depend on prevailing market conditions and other factors.
18. What effect will the proposed abolishment of Secondary Taxation on
Companies in South Africa have on Net1?
On February 21, 2007, the South African Minister of Finance announced in his
National Budget speech that the National Government intends to phase out
Secondary Taxation on Companies, or STC, and introduce a dividend tax at a
shareholder level. Currently, South African companies are required to pay STC
at a rate of 10.00% on dividends distributed, subject to certain exemptions.
If a dividend tax is introduced South African companies will no longer be
liable to pay STC and the shareholder will be liable to pay the dividend tax.
Treaty relief would be available for foreign shareholders.
The reform is being implemented in two phases. The first phase entailed a
reduction of the STC rate, effective October 1, 2007, to 10.00% and the second
phase, now expected in calendar 2010 will result in a total conversion to a
dividend tax. It is likely that South African companies will be required to
withhold the dividend tax on all dividends paid.
We can not reasonably determine whether the second phase will be enacted as
proposed and we will comply with that new tax legislation once it has been
enacted. If the announcements made by the South African Minister of Finance in
his National Budget speeches regarding the second phase are enacted, under
current enacted tax legislation, we expect the proposed replacement of STC
with a dividend tax to reduce our current fully distributed rate of 34.55% to
28%. Under US GAAP, we apply the fully distributed tax rate of 34.55% to our
deferred taxation assets and liabilities. We have not yet determined whether
we would qualify for the treaty relief available to foreign shareholders.
19. What effect did the change in the South African tax rate from 29% to 28%
have on your first half of fiscal 2009 results?
The change in tax rate was promulgated on July 22, 2008. Our fully distributed
tax rate was reduced to 34.55% from 35.45% during the first half of fiscal
2009 and has resulted in an income tax benefit included in our income tax
expense line of $3.5 million.
Johannesburg
5 February 2009
Sponsor to Net1
Deutsche Securities (SA) (Proprietary) Limited
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