Net 1 UEPS Technologies, Inc. Announces Third Quarter 2008 Results
JOHANNESBURG, South Africa, May 8 /PRNewswire-FirstCall/ -- Net 1 UEPS
Technologies, Inc. ("Net1" or the "Company") (Nasdaq: UEPS) today announced
results for the three and nine months ended March 31, 2008.
Results
Three months ended March 31, 2008 and 2007
GAAP GAAP GAAP Fundamental Fundamental Fundamental
Q3 Q3 Variance Q3 Q3 Variance
2008(1) 2007(2) % 2008(3) 2007(3) %
Net
income
(USD'000) 26,967 18,253 48% 23,012 19,323 19%
Earnings
per share,
basic (US
cents) 47 32 47% 40 34 18%
Revenue
(USD'000) 63,066 61,275 3% 63,066 61,275 3%
(1) GAAP Q3 2008 net income and earnings per share, basic, include the
positive effect of the change in the fully distributed tax rate from
36.89% to 35.45%.
(2) GAAP Q3 2007 net income, earnings per share, basic and revenue,
include the positive effect of the non-recurring payment received from
the South Africa Social Security Agency ("SASSA").
(3) 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, stock-based compensation
charges and the effect of the change in the fully distributed tax rate
from 36.89% to 35.45%.
Since the Company's reporting currency is the U.S. 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. During the three months ended March 31, 2008, the USD was stronger
against the ZAR than during the same period in the prior year. During the nine
months ended March 31, 2008, the ZAR was stronger against the USD than during
the same period in the prior year. 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 Fundamental Fundamental Fundamental
Q3 Q3 Variance Q3 Q3 Variance
2008(1) 2007(2) % 2008(3) 2007(3) %
Net
income
(ZAR'000) 199,874 131,586 52% 170,561 139,300 22%
Earnings
per share,
basic (ZAR
cents) 350 231 51% 298 245 22%
Revenue
(ZAR'000) 467,432 441,731 6% 467,432 441,731 6%
(1) GAAP Q3 2008 net income and earnings per share, basic, include the
positive effect of the change in the fully distributed tax rate from
36.89% to 35.45%.
(2) GAAP Q3 2007 net income, earnings per share, basic and revenue,
include the positive effect of the non-recurring payment received from
the South Africa Social Security Agency ("SASSA").
(3) 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, stock-based compensation c
charges and the effect of the change in the fully distributed tax rate
from 36.89% to 35.45%.
Nine months ended March 31, 2008 and 2007
GAAP GAAP GAAP Fundamental Fundamental Fundamental
YTD YTD Variance YTD YTD Variance
2008 2007 % 2008 2007 %
Net
income
(USD'000) 65,213 46,148 41% 65,346 50,720 29%
Earnings
per share,
basic (US
cents) 114 81 41% 114 89 28%
Revenue
(USD'000) 191,825 163,772 17% 191,825 163,772 17%
GAAP GAAP GAAP Fundamental Fundamental Fundamental
YTD YTD Variance YTD YTD Variance
2008 2007 % 2008 2007 %
Net
income
(ZAR'000) 465,008 334,255 39% 465,950 367,392 27%
Earnings
per share,
basic (ZAR
cents) 814.0 587.0 39% 816 645 27%
Revenue
(ZAR'000) 1,367,825 1,186,218 15% 1,367,825 1,186,218 15%
Non-recurring settlement payment received from SASSA in the third quarter
of fiscal 2007
During the third quarter of fiscal 2007, the Company received a non-
recurring settlement payment of approximately $5.9 million (ZAR 43.0 million)
from SASSA as a result of the settlement of contract deviations that occurred
during the implementation phases in the Eastern Cape province and for annual
inflation price increases over the last three years which were not
forthcoming. Attachment C presents the impact of the non-recurring settlement
payment on the Company's reported revenues, operating income and net income.
Attachment D presents the impact of the non-recurring settlement payment on
the Company's reported transaction-based activities revenues, operating income
and operating income margin.
Use of Non-GAAP measures
On July 3, 2006, the Company acquired Prism Holdings Limited ("Prism") and
has combined its results with those of the Company. Effective October 1, 2006,
Prism acquired the remaining 25.1% of EasyPay (Pty) Ltd ("EasyPay"). Under
U.S. 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 and linked unit for the three and nine months ended
March 31, 2008 and 2007 include this amortization of Prism and EasyPay
intangibles acquired and stock-based compensation charge related to these
options and other stock-based awards. Finally, the effect of the change in the
fully distributed tax rate from 36.89% to 35.45% in January 2008 is included
in the Company's net income and earnings per common share and linked unit for
the three and nine months ended March 31, 2008. The Company excludes these
items when calculating fundamental net income and earnings per common share
and linked unit because management believes that these adjustments enhance its
own evaluation, as well as the investor's understanding, of the Company's
performance. Attachment B presents a reconciliation between GAAP and
fundamental net income and earnings per common share and linked unit.
Third Quarter Highlights
-- Conclusion of an agreement to provide an Iraqi consortium the Company's
UEPS system which will generate ongoing transaction and license fees,
as well as revenue related to the provision of outsourcing services and
the sale of hardware;
-- Extension of the Company's five existing contracts to provide welfare
administration and distribution services by 12 months to March 31,
2009;
-- Delivery of hardware and recognition of additional software development
and customization revenues related to the Ghanaian National Switch and
Smart Card Payment System contract;
-- Reduction in the Company's fully distributed tax rate from 36.89% to
35.45%;
-- Merchant acquiring system transactions increased 11% to $264.5 million
in the third quarter of fiscal 2008 from $238.0 million in the third
quarter of fiscal 2007;
-- 11,892,573 grants were paid during the three months ended March 31,
2008 compared to 11,410,296 grants during the three months ended March
31, 2007;
-- 4,222 terminals in use at participating UEPS retail locations at March
31, 2008 versus 4,179 terminals at March 31, 2007, which increase
resulted largely from the broadening of the terminal base in the North
West province;
-- The number of transactions processed per terminal during the third
quarter of fiscal 2008 as compared to the prior period increased 9% to
917 from 845;
-- A total of 3,956,882 UEPS smart card-based accounts were active as of
March 31, 2008, compared to 3,803,150 as of March 31, 2007; and
-- EasyPay processed 129,152,205 transactions during the three months
ended March 31, 2008 compared to 108,803,479 transactions during the
three months ended March 31, 2007, in each case at an average fee per
transaction of $0.03.
Comments and Outlook
"I am delighted to report yet another quarter that has exceeded our
expectations, where our operations continued to deliver solid financial
results and cash flows and we remain on track to achieve our targeted growth
rate for the current fiscal year," said Dr. Serge Belamant, Chairman and Chief
Executive Officer of Net1. "I am particularly pleased with the conclusion of
the contract between Net1 and a consortium comprising the Iraqi government and
local Iraqi banks as this further demonstrates the robustness and
applicability of our technology. The Ghanaian National Switch, known locally
as e-zwich, was officially launched by the President of Ghana last week and we
are extremely proud to have reached this significant milestone. I believe the
success of e-zwich in Ghana will lead to similar contracts in the surrounding
territories," he concluded.
Conference call
Net1 will host a conference call to review third quarter results on May 9,
2008 at 8:00 a.m. Eastern Daylight Time. To participate in the call, dial 1-
800-860-2442 (U.S. 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 May 30, 2008.
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
African based subsidiary of the Company, and provide the Company with the
building blocks for developing secure end-to-end payment solutions.
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.
NET 1 UEPS TECHNOLOGIES, INC.
Unaudited Condensed Consolidated Statements of Operations
Three months Nine months ended
ended
March 31, March 31,
2008 2007 2008 2007
(In thousands, (In thousands,
except per share except per share
data) data)
REVENUE $63,066 $61,275 $191,825 $163,772
EXPENSE
COST OF GOODS SOLD, IT
PROCESSING, SERVICING AND
SUPPORT 16,515 13,940 51,833 38,185
SELLING, GENERAL AND
ADMINISTRATION 15,185 15,515 48,915 44,690
DEPRECIATION AND AMORTIZATION 2,716 2,752 8,295 8,512
OPERATING INCOME 28,650 29,068 82,782 72,385
INTEREST INCOME, net 3,754 735 10,852 2,793
INCOME BEFORE INCOME TAXES 32,404 29,803 93,634 75,178
INCOME TAX EXPENSE 5,156 11,397 27,816 28,927
NET INCOME FROM CONTINUING
OPERATIONS BEFORE MINORITY
INTEREST AND (LOSS) EARNINGS
FROM EQUITY-ACCOUNTED
INVESTMENTS 27,248 18,406 65,818 46,251
MINORITY INTEREST - - (196) 205
(LOSS) EARNINGS FROM EQUITY
ACCOUNTED INVESTMENTS (281) (153) (801) 102
NET INCOME $26,967 $18,253 $65,213 $46,148
Net income per share
Basic earnings, in cents -
common stock and linked units 47.2 32.1 114.1 81.1
Diluted earnings, in cents -
common stock and linked units 46.7 31.8 113.1 80.3
NET 1 UEPS TECHNOLOGIES, INC.
Condensed Consolidated Balance Sheets
Unaudited (A)
March 31, June 30,
008 2007
(In thousands, except
share data)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $235,630 $171,727
Pre-funded social welfare grants receivable 24,348 26,817
Accounts receivable, net of allowances of -
March: $345; June: $555 24,767 30,503
Finance loans receivable, net of allowances
of - March: $2,667; June: $2,773 4,930 5,755
Deferred expenditure on smart cards - 507
Inventory 5,106 5,645
Deferred income taxes 4,049 7,028
Total current assets 298,830 247,982
LONG-TERM RECEIVABLE 1 54
PROPERTY, PLANT AND EQUIPMENT, NET OF ACCUMULATED
DEPRECIATION OF - March: $23,728; June: $24,406 6,426 7,582
EQUITY-ACCOUNTED INVESTMENTS 2,521 2,992
GOODWILL 74,945 85,871
INTANGIBLE ASSETS, NET OF ACCUMULATED AMORTIZATION
OF - March: $16,650; June: $13,745 23,146 31,609
TOTAL ASSETS 405,869 376,090
LIABILITIES
CURRENT LIABILITIES
Bank overdraft - 16
Accounts payable 5,320 5,879
Other payables 44,779 34,457
Income taxes payable 13,581 14,346
Total current liabilities 63,680 54,698
DEFERRED INCOME TAXES 29,955 36,219
INTEREST BEARING LIABILITIES - minority interest
loans 4,276 4,100
COMMITMENTS AND CONTINGENCIES - -
TOTAL LIABILITIES 97,911 95,017
SHAREHOLDERS' EQUITY
COMMON STOCK
Authorized: 83,333,333 with $0.001 par value;
Issued shares - March: 52,950,885; June: 52 52
51,730,547
SPECIAL CONVERTIBLE PREFERRED STOCK
Authorized: 50,000,000 with $0.001 par value;
Issued and outstanding shares - March: 5 5
5,088,885; June: 5,656,110
B CLASS PREFERENCE SHARES
Authorized: 330,000,000 with $0.001 par
value; Issued and outstanding shares (net of shares
held by the Company) - March: 37,497,073;
June: 41,676,625 6 7
ADDITIONAL PAID-IN-CAPITAL 115,203 112,167
TREASURY SHARES, AT COST: March: 299,821; June:
299,821 (7,795) (7,795)
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) (44,783) (3,915)
RETAINED EARNINGS 245,270 180,552
TOTAL SHAREHOLDERS' EQUITY 307,958 281,073
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 405,869 $376,090
(A) - Derived from audited financial statements
NET 1 UEPS TECHNOLOGIES, INC.
Unaudited Condensed Consolidated Statements of Cash Flows
Three months Nine months
ended ended
March 31, March 31,
2008 2007 2008 2007
(In thousands) (In thousands)
Cash flows from operating
activities
Net income $ 26,967 $ 18,253 $ 65,213 $ 46,148
Depreciation and amortization 2,716 2,752 8,295 8,512
Loss (Earnings) from equity-
accounted investments 281 153 801 (102)
Fair value adjustment related to
financial liabilities (14) 25 (256) 178
Fair value of FAS 133 derivative
adjustments (11) (58) (21) 19
Interest payable 126 110 367 110
Profit on disposal of property,
plant and equipment (23) (58) (109) (125)
Minority interest - - (196) 205
Stock-based compensation charge 1,108 190 2,860 686
(Increase) Decrease in accounts
receivable, pre-funded social
welfare grants receivable and
finance loans receivable 15,842 (32,566) (2,406) (35,118)
Decrease in deferred expenditure
on smart cards 236 (61) 496 133
Decrease (Increase) in inventory 1,286 210 (293) (2,543)
(Decrease) Increase in accounts
payable and other payables 13,177 11,436 13,490 490
Decrease in taxes payable 7,666 5,649 1,034 2,271
Increase (Decrease) in deferred
taxes (4,182) (1,898) 574 (1,745)
Net cash (used in) provided by
operating activities 65,175 4,137 89,849 19,119
Cash flows from investing activities
Capital expenditures (1,004) (943) (2,880) (2,646)
Proceeds from disposal of property,
plant and equipment 24 116 142 262
Acquisition of Prism Holdings
Limited, net of cash acquired - (9,713) - (92,043)
Acquisition of equity interest in
and advance of loans to equity
accounted investment - (310) - (310)
Net cash used in investing
activities (980) (10,850) (2,738) (94,737)
Cash flows from financing activities
Proceeds from issue of share capital,
net of share issue expenses 25 - 175 50
Proceeds from bank overdrafts - 148 1,462 61,731
Repayment of bank overdraft (1) - (1,443) (62,272)
Proceeds from interest bearing
liabilities - - - 3,513
Net cash provided by financing
activities 24 148 194 3,022
Effect of exchange rate changes on
cash (29,330) (2,447) (23,402) 1,751
Net (decrease) increase in cash
and cash equivalents 34,889 (9,012) 63,903 (70,845)
Cash and cash equivalents -
beginning of period 200,741 127,902 171,727 189,735
Cash and cash equivalents -
end of period $235,630 $118,890 $235,630 $118,890
Net 1 UEPS Technologies, Inc.
Attachment A
Key metrics and statistics at and for the three months ended March 31,
2008 and 2007 and December 31, 2007:
Three months ended March 31, 2008 and 2007 and December 31, 2007
Key statement of operations data,
in '000, except EPS
Change - constant
Change-actual exchange rate(1)
Q3 '08 Q3 '08 Q3 '08 Q3 '08
Q3 '08 Q3 '07 Q2 '08 vs vs vs vs
USD USD USD Q3 '07 Q2 '08 Q3 '07 Q2 '08
Revenue $63,066 $61,275 $68,500 3% (8)% 6% 1%
Operating
income 28,650 29,068 28,226 (1)% 2% 1% 11%
Income tax
expense 5,156 11,397 11,788 (55)% (56)% (53)% (52)%
Net income $26,967 $18,253 $20,318 48% 33% 52% 45%
Earnings per
share,
Basic
(cents) 47 32 36 47% 31% 51% 43%
Diluted
(cents) 47 32 35 47% 34% 51% 47%
Fundamental
earnings
per share,
Basic
(cents) 40 34 39 18% 3% 21% 12%
Key segmental data, in '000,
except margins
Revenue:
Transaction-
based
activ-
ities $37,254 $40,962 $39,991 (9)% (7)% (6)% 2%
Smart card
accounts 8,696 8,655 9,637 -% (10)% 3% (1)%
Financial
services 1,999 2,858 2,135 (30)% (6)% (28)% 2%
Hardware,
software
and related
technology
sales 15,117 8,800 16,737 72% (10)% 77% (1)%
Total
consolidated
revenue $63,066 $61,275 $68,500 3% (8)% 6% 1%
Consolidated operating income (loss):
Transaction-
based
activ-
ities $20,347 $24,869 $21,381 (18)% (5)% (16)% 4%
Smart card
accounts 3,953 3,934 4,380 -% (10)% 3% (1)%
Financial
services 507 930 458 (45)% 11% (44)% 21%
Hardware,
software
and related
technology
sales 5,380 991 2,265 443% 138% 458% 160%
Corporate/
Eliminat-
ions (1,537) (1,656) (258) (7)% 496% (5)% 552%
Total
operating
income $28,650 $29,068 $28,226 (1)% 2% 1% 11%
Operating
income
margin (%)
Transaction-
based
activities 55% 61% 53%
Smart card
accounts 45% 45% 45%
Financial
services 25% 33% 21%
Hardware,
software
and related
technology
sales 36% 11% 14%
Overall
operating
margin 45% 47% 41%
Mar 31, June 30,
2008 2007 Change
Key balance sheet
data, in '000
Cash and cash
equivalents $235,630 $171,727 37%
Total current
assets 298,830 247,982 21%
Total assets 405,869 376,090 8%
Total current
liabilities 63,680 54,698 16%
Total shareholders'
equity $307,958 $281,073 10%
(1) This information shows what the change in these items would have been
if the USD/ ZAR exchange rate that prevailed during the third quarter
of fiscal 2008 also prevailed during the third quarter of fiscal 2007
and the second quarter of fiscal 2008.
Three months ended March 31, 2008 and 2007 and December 31, 2007
(continued)
Change
Q3 '08 Q3 '08
Additional vs vs
information: Q3 '08 Q3 '07 Q2 '08 Q3 '07 Q2 '08
Transaction-based
activities:
Total number of grants
paid:
KwaZulu-Natal 5,051,827 5,079,328 5,063,374 (1)% -%
Limpopo 2,949,459 2,925,621 2,948,717 1% -%
North West 1,245,238 833,683 1,230,354 49% 1%
Northern Cape 494,664 417,990 498,874 18% (1)%
Eastern Cape 2,151,385 2,153,674 2,155,433 -% -%
11,892,573 11,410,296 11,896,755 4% -%
Average revenue per ZAR ZAR ZAR
grant paid:
KwaZulu-Natal 21.76 19.35 22.11 12% (2)%
Limpopo 18.32 16.19 17.39 13% 5%
North West 22.19 21.19 21.43 5% 4%
Northern Cape 20.26 18.62 18.37 9% 10%
Eastern Cape 16.56 12.89 16.11 28% 3%
UEPS merchant
acquiring system:
Terminals installed
at period end 4,222 4,179 4,304 1% (2)%
Number of
participating
retail locations
at period end 2,468 2,511 2,532 (2)% (3)%
Value of transactions
processed through
POS devices during
the quarter
(in ZAR '000) 1,996,072 1,726,532 1,757,836 16% 14%
Value of transactions
processed through
POS devices during
the completed pay
cycles for the
quarter (in
ZAR '000) 2,022,938 1,634,410 1,870,595 24% 8%
Average number of
grants processed
per terminal during
the quarter 917 845 799 9% 15%
Average number of
grants processed
per terminal during
the completed pay
cycles for the
quarter 933 807 851 16% 10%
EasyPay transaction fees:
Number of
transactions
processed 129,152,205 108,803,479 135,283,353 19% (5)%
Average fee per
transaction (in ZAR) 0.20 0.21 0.21 (5)% (5)%
Three months ended March 31, 2008 and 2007 and December 31, 2007
(continued)
Change
Q3 '08 Q3 '08
vs vs
Q3 '08 Q3 '07 Q2 '08 Q3 '07 Q2 '08
Smart card accounts:
Total number
of smart
card accounts 3,956,882 3,803,150 3,976,684 4% -%
Hardware, software
and related
technology sales:
Ad hoc significant
hardware sales
(USD '000)
Nedbank hardware 600 - 2,000 n/m
Ghanaian National
Switch and Smart
Card Payment
System Contract 4,300 - 5,600 n/m
Smartswitch Botswana
hardware and
software (before
consolidation
adjustments) - - -
Financial services:
(USD '000)
Traditional
microlending:
Finance loans
receivable -
gross 4,611 7,112 5,336 (35)% (14)%
Allowance for
doubtful finance
loans
receivable (2,667) (4,359) (3,153) (39)% (15)%
Finance loans
receivable - net 1,944 2,753 2,183 (29)% (11)%
UEPS-based lending:
Finance loans
receivable - net
and gross (i.e.,
no provisions) 2,986 3,457 4,086 (14)% (27)%
Earnings (Loss) from
equity accounted
investments:
(USD '000)
Beginning of period (2,352) 1,169 (2,112)
Equity-accounted
earnings (loss) (281) (153) (236)
Equity-accounted
earnings - Permit 16 306 -
Equity-accounted
earnings (loss) -
SmartSwitch Namibia(1) (71) (74) (6)
Equity-accounted
earnings (loss) -
SmartSwitch
Botswana(1) (164) (128) (31)
Equity-accounted (loss)
- VTU Colombia (62) (257) (168)
Equity-accounted (loss)
- VinaPay (281) - (31)
Sale of Permit - -
Foreign currency
adjustment 244 (25) (4)
End of period (2,389) 991 (2,352)
nm - Statistic not meaningful
Key metrics and statistics at and for the nine months ended March 31, 2008
and 2007:
Nine months ended March 31, 2008 and 2007
Nine months ended
Mar 31, Change Year ended
Constant June 30,
2008 2007 Exchange 2007
USD USD Actual Rate (1) USD
Key statement of
operations data,
in '000,
except EPS
Revenue $191,825 $163,772 17% 15% $223,968
Operating income 82,782 72,385 14% 13% 96,876
Income tax expense 27,816 28,927 (4)% (5)% 37,574
Net income $65,213 $46,148 41% 39% $63,679
Earnings per share,
Basic (cents) 114 81.1 41% 38% 112
Diluted (cents) 113 80.3 41% 39% 111
Fundamental earnings
per share,
Basic (cents) 114 89.1 28% 26% 123
Key segmental data,
in '000, except
margins
Revenue:
Transaction-based
activities $115,409 $103,172 12% 10% $139,006
Smart card
accounts 27,469 25,722 7% 5% 34,562
Financial
services 6,317 8,636 (27)% (28)% 11,241
Hardware, software
and related
technology
sales 42,630 26,242 62% 60% 39,159
Total
consolidated
revenue $191,825 $163,772 17% 15% $223,968
Consolidated
operating income
(loss):
Transaction-based
activities $62,317 $60,799 2% 1% $78,785
Smart card
accounts 12,485 11,692 7% 5% 15,710
Financial
services 1,411 2,758 (49)% (50)% 3,351
Hardware,
software and
related
technology
sales 9,585 2,621 266% 260% 6,115
Corporate/
Eliminations (3,016) (5,485) (57)% (46)% (7,085)
Total operating
income $82,782 $72,385 14% 13% $96,876
Operating income
margin (%)
Transaction-based
activities 53% 59% 57%
Smart card accounts 45% 45% 45%
Financial services 22% 32% 30%
Hardware, software
and related
technology sales 23% 10% 16%
Overall operating
margin 43% 44% 43%
Mar 31, June 30,
2008 2007 Change
Key balance sheet
data, in '000
Cash and cash
equivalents $235,630 $171,727 37%
Total current
assets 298,830 247,982 21%
Total assets 405,869 376,090 8%
Total current
liabilities 63,680 54,698 16%
Total shareholders'
equity $307,958 $281,073 10%
(1) -- This information shows what the change in these items would have
been if the USD/ ZAR exchange rate that prevailed during the nine
months ended March 31, 2008 also prevailed during the nine months
ended March 31, 2007.
Nine months ended March 31, 2008 and 2007 (continued)
Nine months ended Year ended
Mar 31, Change June 30,
2008 2007 2007
Additional information:
Transaction-based
activities:
Total number of grants
paid:
KwaZulu-Natal 15,155,356 15,017,233 1% 20,080,685
Limpopo 8,833,286 8,724,102 1% 11,662,537
North West 3,694,651 2,481,696 49% 3,351,477
Northern Cape 1,489,641 1,247,935 19% 1,669,037
Eastern Cape 6,444,793 6,426,585 -% 8,568,506
35,617,727 33,897,551 5% 45,332,242
Average revenue per
grant paid: ZAR ZAR ZAR
KwaZulu-Natal 21.63 19.90 9% 20.04
Limpopo 17.49 16.16 8% 16.32
North West 21.58 20.17 7% 20.73
Northern Cape 19.23 18.67 3% 18.64
Eastern Cape 15.90 12.19 30% 12.90
UEPS merchant acquiring
system:
Terminals installed at
period end 4,222 4,179 1% 4,357
Number of participating
retail locations at
period end 2,468 2,511 (2)% 2,598
Value of transactions
processed through
POS devices during the
quarter (in ZAR '000) 1,996,072 1,726,532 16% 1,777,436
Value of transactions
processed through POS
devices during the
completed pay cycles
for the quarter(in
ZAR '000) 2,022,938 1,634,410 24% 1,777,738
Average number of
grants processed
per terminal during
the quarter 917 845 9% 811
Average number of
grants processed per
terminal during the
completed pay cycles
for the quarter 933 807 16% 810
EasyPay transaction fees:
Number of transactions
processed 383,468,457 327,261,557 17% 441,439,169
Average fee per
transaction (in ZAR) 0.20 0.21 (5)% 0.21
Nine months ended March 31, 2008 and 2007 (continued)
Nine months ended Year ended
Mar 31, Change June 30,
2008 2007 2007
Smart card accounts:
Total number of smart
card accounts 3,956,882 3,803,150 4% 3,812,273
Hardware, software and
related technology sales:
Ad hoc significant
hardware sales
(USD '000)
Nedbank hardware 2,600 - nm 4,400
Ghanaian National Switch
and Smart Card Payment
System Contract 10,800 - nm -
Smartswitch Botswana
hardware and software
(before consolidation
adjustments) - - nm 2,100
Financial services: (USD '000)
Traditional microlending:
Finance loans receivable
- gross 4,611 7,112 (35)% 5,263
Allowance for doubtful
finance loans receivable (2,667) (4,359) (39)% (2,773)
Finance loans receivable
- net 1,944 2,753 (29)% 2,490
UEPS-based lending:
Finance loans receivable -
net and gross (i.e., no
provisions) 2,986 3,457 (14)% 3,265
Earnings (Loss) from equity
accounted investments:
(USD '000)
Beginning of period (1,774) 874 874
Equity-accounted earnings
(loss) (801) 102 181
Equity-accounted earnings
- Permit - 1,360 1,415
Equity-accounted earnings
(loss) - SmartSwitch
Namibia(1) 4 (318) (262)
Equity-accounted earnings
(loss) - SmartSwitch
Botswana(1) (194) (683) (593)
Equity-accounted (loss) -
VTU Colombia (491) (257) (379)
Equity-accounted (loss) -
VinaPay (120) - -
Sale of Permit - - (2,805)
Foreign currency adjustment 186 15 (24)
End of period (2,389) 991 (1,774)
nm - Statistic not meaningful
(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 March 31, 2008
Three months ended March 31,
Amortization
of
Prism and
EasyPay Stock- Change 2008
2008 intangible based in tax Funda-
GAAP assets(1) charge(2) rate(3) mental
Net income (USD'000) 26,967 856 1,108 (5,919) 23,012
Earnings per share,
basic (USD cents) 47 40
Net income (ZAR'000) 199,874 6,344 8,212 (43,869) 170,561
Earnings per share,
basic (ZAR cents) 350 298
(1) Amortization of Prism and EasyPay Intangibles, net of deferred tax
benefit:
$ '000 ZAR '000
Customer relationships 355 2,630
Trademarks 92 679
Software and unpatented
technology 896 6,642
Deferred tax benefit (487) (3,607)
856 6,344
(2) Includes stock-based compensation charges related to options and
non-vested stock awards granted under the Amended and Restated Net 1
UEPS Technologies, Inc. 2004 Stock Incentive Plan and stock options
granted to employees of Prism.
(3) Represents the effect of the change in the fully distributed tax rate
from 36.89% to 35.45%.
Three months ended March 31, 2007
Three months ended March 31,
Amortization
of Prism and
EasyPay Stock- 2007
2007 intangible based Funda
GAAP assets(1) charge(2) -mental
Net income (US$'000) 18,253 880 190 19,323
Earnings per share, basic
(US$ cents) 32 34
Net income (ZAR'000) 131,586 6,344 1,370 139,300
Earnings per share, basic
(ZAR cents) 231 245
(1) Amortization of Prism and EasyPay Intangibles, net of deferred tax
benefit:
$ '000 ZAR '000
Customer relationships 365 2,630
Software and unpatented
technology 94 679
Trademarks 921 6,642
Deferred tax benefit (500) (3,607)
880 6,344
(2) Includes stock-based compensation charge related to options granted to
employees of Prism and under the Amended and Restated Net 1 UEPS
Technologies, Inc. 2004 Stock Incentive Plan.
Nine months ended March 31, 2008
Nine months ended March 31,
Amortization
of
Prism and
EasyPay Stock- 2008
2008 intangible based Change in Funda
GAAP assets(1) charge(2) tax rate(3) -mental
Net income (USD'000) 65,213 2,670 2,860 (5,397) 65,346
Earnings per share,
basic (USD cents) 114 114
Net income (ZAR'000) 465,008 19,032 20,394 (38,484) 465,950
Earnings per share,
basic (ZAR cents) 814 816
(1) Amortization of Prism and EasyPay Intangibles, net of deferred tax
benefit:
$ '000 ZAR '000
Customer relationships 1,107 7,890
Trademarks 286 2,036
Software and unpatented
technology 2,795 19,927
Deferred tax benefit (1,518) (10,821)
2,670 19,032
(2) Includes stock-based compensation charges related to options and
non-vested stock awards granted under the Amended and Restated Net 1
UEPS Technologies, Inc. 2004 Stock Incentive Plan and stock options
granted to employees of Prism.
(3) Represents the effect of the change in the fully distributed tax rate
from 36.89% to 35.45%.
Nine months ended March 31, 2007
Nine months ended March 31,
Amortization Expenses
of associated
Prism and with
EasyPay Stock- acquisition 2007
2007 intangible based not Funda-
GAAP assets(1) charge(2) pursued(3) mental
Net income (US$'000) 46,148 2,548 836 1,188 50,720
Earnings per share,
basic (US$ cents) 81 89
Net income (ZAR'000) 334,255 18,457 6,055 8,625 367,392
Earnings per share,
basic (ZAR cents) 587 645
(1) Amortization of Prism and EasyPay Intangibles, net of deferred tax
benefit:
US$ '000 ZAR '000
Customer relationships 1,024 7,410
Software and unpatented
technology 272 1,972
Trademarks 2,714 19,661
Deferred tax benefit (1,462) (10,586)
2,548 18,457
(2) Includes stock-based compensation charge related to options granted to
employees of Prism and under the Amended and Restated Net 1 UEPS
Technologies, Inc. 2004 Stock Incentive Plan.
(3) Represents expenses associated with a potential acquisition that Net1
ultimately decided not to pursue during the three months ended
December 31, 2006.
Net 1 UEPS Technologies, Inc.
Attachment C
Impact of non-recurring settlement payment received from SASSA in the
third quarter of fiscal 2007 on the Company's reported revenues, operating
income and net income:
Three months ended March 31, 2008 and 2007
Three months ended March 31,
2008 2007 %
USD '000 USD '000 change
Reported revenue 63,066 61,275 3%
Consisting of:
Revenue before non-recurring portion
of settlement payment received from
SASSA 63,066 55,350 14%
Non-recurring portion of settlement
payment received from SASSA - 5,925
Reported operating income 28,650 29,068 (1)%
Consisting of:
Operating income before non-recurring
portion of settlement payment received
from SASSA 28,650 25,099 14%
Non-recurring portion of settlement
payment received from SASSA - 3,969
Reported net income 26,967 18,253 48%
Consisting of:
Net income before non-recurring portion
of settlement payment received from
SASSA 26,967 15,748 71%
Non-recurring portion of settlement
payment received from SASSA - 2,505
Three months ended March 31,
2008 2007 %
ZAR '000 ZAR '000 change
Reported revenue 467,432 441,731 6%
Consisting of:
Revenue before non-recurring portion of
settlement payment received from
SASSA 467,432 398,777 17%
Non-recurring portion of settlement
payment received from SASSA - 42,954
Reported operating income 212,348 209,551 1%
Consisting of:
Operating income before non-recurring
portion of settlement payment received
from SASSA 212,348 180,775 17%
Non-recurring portion of settlement
payment received from SASSA - 28,776
Reported net income 199,874 131,586 52%
Consisting of:
Net income before non-recurring portion
of settlement payment received from
SASSA 199,874 113,426 76%
Non-recurring portion of settlement
payment received from SASSA - 18,160
Nine months ended March 31, 2008 and 2007
Nine months ended March 31,
2008 2007 %
USD '000 USD '000 change
Reported revenue 191,825 163,772 17%
Consisting of:
Revenue before non-recurring portion of
settlement payment received from SASSA 191,825 157,847 22%
Non-recurring portion of settlement
payment received from SASSA - 5,925
Reported operating income 82,782 72,385 14%
Consisting of:
Operating income before non-recurring
portion of settlement payment received
from SASSA 82,782 68,416 21%
Non-recurring portion of settlement
payment received from SASSA - 3,969
Reported net income 65,213 46,148 41%
Consisting of:
Net income before non-recurring portion
of settlement payment received from
SASSA 65,213 43,643 49%
Non-recurring portion of settlement
payment received from SASSA - 2,505
Nine months ended March 31,
2008 2007 %
ZAR '000 ZAR '000 change
Reported revenue 1,367,825 1,186,218 15%
Consisting of:
Revenue before non-recurring portion
of settlement payment received from
SASSA 1,367,825 1,143,264 20%
Non-recurring portion of settlement
payment received from SASSA - 42,954
Reported operating income 590,284 524,292 13%
Consisting of:
Operating income before non-recurring
portion of settlement payment
received from SASSA 590,284 495,516 19%
Non-recurring portion of settlement
payment received from SASSA - 28,776
Reported net income 465,006 334,255 39%
Consisting of:
Net income before non-recurring portion
of settlement payment received from
SASSA 465,006 316,095 47%
Non-recurring portion of settlement
payment received from SASSA - 18,160
Net 1 UEPS Technologies, Inc.
Attachment D
Impact of non-recurring settlement payment received from SASSA in the
third quarter of fiscal 2007 on the Company's reported transaction-based
activities revenues, operating income and operating income margin:
Three months ended March 31, 2008 and 2007
Three months ended March 31,
2008 2007 %
USD '000 USD '000 change
Reported revenue 37,254 40,962 (9)%
Consisting of:
Recurring transaction-based activities 37,254 35,037 6%
Non-recurring portion of settlement
payment received from SASSA - 5,925
Reported operating income 20,347 24,869 (18)%
Consisting of:
Recurring transaction-based activities 20,347 20,900 (3)%
Non-recurring portion of settlement
payment received from SASSA - 3,969
Operating income margin as reported 55% 61% (10)%
Consisting of:
Recurring transaction-based activities(1) 55% 60% (8)%
Non-recurring portion of settlement
payment received from SASSA - 67%
Three months ended March 31,
2008 2007 %
ZAR '000 ZAR '000 change
Reported revenue 276,119 295,295 (6)%
Consisting of:
Recurring transaction-based activities 276,119 252,341 9%
Non-recurring portion of settlement
payment received from SASSA - 42,954
Reported operating income 150,808 179,281 (16)%
Consisting of:
Recurring transaction-based activities 150,808 150,505 -%
Non-recurring portion of settlement
payment received from SASSA - 28,776
Operating income margin as reported 55% 61% (10)%
Consisting of:
Recurring transaction-based activities 55% 60% (8)%
Non-recurring portion of settlement
payment received from SASSA - 67%
Nine months ended March 31, 2008 and 2007
Nine months ended March 31,
2008 2007 %
USD '000 USD '000 change
Reported revenue 115,409 103,172 12%
Consisting of:
Recurring transaction-based activities 115,409 97,247 19%
Non-recurring portion of settlement
payment received from SASSA - 5,925
Reported operating income 62,317 60,799 2%
Consisting of:
Recurring transaction-based activities 62,317 56,830 10%
Non-recurring portion of settlement
payment received from SASSA - 3,969
Operating income margin as reported 54% 59% (8)%
Consisting of:
Recurring transaction-based activities 54% 58% (8)%
Non-recurring portion of settlement
payment received from SASSA - 67%
Nine months ended March 31,
2008 2007 %
ZAR '000 ZAR '000 change
Reported revenue 822,934 747,286 10%
Consisting of:
Recurring transaction-based activities 822,934 704,332 17%
Non-recurring portion of settlement
payment received from SASSA - 42,954
Reported operating income 444,357 440,374 1%
Consisting of:
Recurring transaction-based activities 444,357 411,598 8%
Non-recurring portion of settlement
payment received from SASSA - 28,776
Operating income margin as reported 54% 59% (8)%
Consisting of:
Recurring transaction-based activities 54% 58% (8)%
Non-recurring portion of settlement
payment received from SASSA - 67%
ADD: /FIRST AND FINAL ADD -- NETH084 -- Net 1 UEPS Technologies, Inc. Earnings/
Net 1 UEPS Technologies, Inc.
Attachment E
FREQUENTLY ASKED QUESTIONS
1. What is the status of the SASSA tender and on what basis did Net1
submit a proposal?
The South African Social Security Agency, or SASSA, is in the process of
conducting a national tender for the distribution of welfare grants in which
bidders had the opportunity to bid for all of South Africa or on a
province-by-province basis. On May 4, 2007, we filed proposals for each of
South Africa's nine provinces, as well as a proposal for the entire country.
SASSA provided an indicative time-frame for the evaluation of the tender
proposals and the award of the contract to successful bidders, but all of the
key dates have already been missed. As part of the evaluation process for the
tender, all bidders were requested to demonstrate their proposed payment
solution to SASSA. Our response to the request for proposal was demonstrated
to the SASSA evaluation committee on October 25, 2007. In December 2007, we
received a notice to bidders from SASSA requesting further details of our
financial proposals in a standard format provided in the notice to bidders by
no later than December 28, 2007. We provided our response to the notice to
bidders to SASSA on December 28, 2007.
On January 31, 2008, we received a further notice to bidders from SASSA
advising bidders that, due to unforeseen circumstances, the tender evaluation
process had not been completed and, as a result, SASSA was requesting
tenderers to extend the validity period of their tender responses from
February 9, 2008 to March 31, 2008. SASSA has extended our five existing
contracts to provide welfare administration and distribution services by 12
months to March 31, 2009. SASSA reserves the right to terminate any of the
five existing contracts on 30 days written notice, but only after an initial
period of six months which ends on September 30, 2008.
On March 27, 2008, we received a further notice to bidders from SASSA
advising bidders that, due to unforeseen circumstances, the tender evaluation
process had still not been completed and, as a result, SASSA was requesting
tenderers to extend the validity period of their tender responses by a further
three months to June 30, 2008. We responded to SASSA in writing stating that
we would extend the validity of our proposal as requested. On April 21, 2008,
SASSA announced an update on the progress of the social grants tender process.
It stated that the evaluation committee that has been processing the nine
provincial tenders has completed its work, and that at this time, there is
being constituted an adjudication committee which will deliberate on the
tender and make a final recommendation on the award per province to the
accountable authority. SASSA stated that the process is on track and that the
outcome will be announced as soon as the process is finalized. SASSA did not
provide any additional indication of when there would be further announcements
or when the process would be completed. It also did not indicate how the
process it described would adjudicate proposals, as in the case of one of the
proposals that we submitted, that covered the entire country rather than just
certain provinces. Because of the extensive delays in the tender award
process, we cannot predict whether or not contracts will ultimately be awarded
on the basis of the current proposals, whether SASSA will seek further
extensions of proposals or whether a new process might be initiated by SASSA.
We believe that our successful record with our provincial government
contracts will provide us with a good opportunity to benefit from the
transition to national administration of social welfare grants because we may
be able to obtain contracts to distribute grants in provinces with which we do
not currently have a contractual relationship. However, there is a chance that
a national tender could lead to our losing one or more of our current
contracts if SASSA decides to appoint a single (or other) contractor to
provide social welfare grant distribution and we are not chosen. During this
transition period our existing provincial government contracts will continue
to be governed by their respective terms.
2. How will the tenders be adjudicated?
The tenders will be adjudicated by a committee appointed by SASSA. The
submissions will be evaluated in terms of the following 100-point scoring
system:
-- Technological solution: 60 points
-- Financial proposal: 30 points
-- Black economic empowerment procurement objectives: 10 points
3. How will the pricing for any future contracts with SASSA change from
the current base?
Our pricing proposals are obviously confidential during this stage of the
tendering process and we can not reveal any details of what we have proposed.
Should we be successful with some or all of our proposals, the final pricing
will depend on the options selected by SASSA and the service level agreement
negotiations. As soon as we have finality on these prices upon completion of
the tender process, we will provide a detailed update on the financial
implications for Net1.
4. Can any interested party, such as an investor or analyst, talk to SASSA
about the tenders and the process?
Please refrain from contacting SASSA during the tender process as the
tender evaluation process is conducted in a secure and confidential manner.
5. How do you forecast growth in beneficiary numbers?
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
approximately 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.
6. What is the status of the wage payment system implementation with
Grindrod Bank and how will Net1 derive income from the relationship with
Grindrod Bank?
In January 2007, we signed a co-operation agreement with Grindrod Bank, a
fully registered bank in South Africa, for the establishment of a retail
banking division within Grindrod Bank that will focus on deploying our wage
payment solution in South Africa. Since the establishment of the division
during the third quarter of fiscal 2007, all the relevant technological
platforms have been installed, where required, or integrated between Net1 and
Grindrod. Grindrod Bank, with Net1's assistance, has joined the South African
National Payment System and the various payment clearing houses in South
Africa.
In parallel, Net1 and Grindrod Bank have defined the products, pricing and
marketing strategy for the wage payment system. Net1 and Grindrod Bank have
commenced pilot operations of the wage payment system mainly in the
agricultural sector. We are still in discussion with several trade unions,
payroll processors, financial services providers, large retailers and large
employer groups who have the desire, and ability, to market and distribute our
wage payment solution on a national basis. We have concluded agreements with
the relevant financial services providers to ensure that we offer our customer
base a complete suite of financial solutions. We expect to officially launch
the wage payment system in the KwaZulu-Natal province on May 12, 2008.
7. 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?
What goals have been set and when will the first customers be signed up?
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-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.
8. What is Net1's strategy in expanding the UEPS technology outside South
Africa?
Our strategy to introduce the UEPS technology outside of South Africa
consists of the following key components:
-- Developing countries -- We believe that our UEPS technology is ideally
suited to "third world" economies where communications infrastructures
are limited and the need for off-line payment technology is the
greatest. Potential users of our technology in these countries are
generally government agencies, employers, merchants and financial
service providers and individuals, who may have a need for all or any
number, or any, of our applications and products. We analyze potential
target countries to determine the most appropriate entry point in terms
of users and applications and we establish relationships with the most
likely customers. We believe that the most efficient way to deploy our
technology in any country is for a local partner, or partners, to
invest in the establishment of a UEPS switch and for these partners to
implement and operate the technology, with our guidance and assistance.
We refer to these UEPS switches as "SmartSwitch" for the relevant
territory. We often participate as shareholders in the local switch as
most partners prefer the supplier of the technology to have an on-going
interest in the deployment and operation of the technology. In some
cases, we enter new territories as a result of our participation in a
tender process that calls for a solution to which our technology is
ideally suited. In these instances, we are generally not offered a
shareholding. Initially, we have focused our marketing efforts on the
African continent where the need for our technology is arguably the
greatest across the entire continent and because we have a good
understanding of African business methodology and culture. Our
proximity to most African countries, as well as the multiplier effect
of having several implementations across the continent, also ensures a
high amount of interest from the African continent; and
-- Developed world -- We believe that some of our UEPS applications and
products are ideally suited to a "first world" environment, such as
secure internet-based payments and mobile telephony transacting. We
expect to offer these products to service providers such as mobile
phone operators, financial institutions and internet-based retailers in
the near future.
9. What are the economics of a new SmartSwitch implementation?
The financial implications to Net1 of a new SmartSwitch implementation
consist of the following elements:
-- Sale of hardware and software licenses to the SmartSwitch: Net1
provides all the necessary hardware and software licenses to any new
SmartSwitch on market-related and arms-length terms, regardless of
whether we are a shareholder in the SmartSwitch. If we are a
shareholder in the SmartSwitch, we eliminate the appropriate portion of
the profit on the sale of hardware and software licenses to the
SmartSwitch in our reported financial statements. Any ongoing sales of
hardware, additional software licenses, customization and maintenance
services are treated in the same manner.
-- Transaction fees, license fees and profit sharing: We receive annual
license fees from any new switch that has been licensed with our
technology. In some cases, we also negotiate a transaction fee payable
to us for each transaction processed through the SmartSwitch. If we are
a significant minority shareholder in the SmartSwitch, as is the case
with SmartSwitch Namibia and SmartSwitch Botswana, we will include the
financial results of the SmartSwitch in our reported financial
statements on an equity accounting basis. If we are the majority
shareholder in a SmartSwitch, such as SmartSwitch Nigeria, we
consolidate the financial results of the SmartSwitch as part of the
Net1 group. Our business plans and experience indicate that a
SmartSwitch implementation will generally break even, on an operating
profit basis, after twelve months of operation. We expect the
SmartSwitch to generate revenues of $0.50 per card holder per month
after another year of operation, increasing to $3.00 per cardholder
after five years of operation. These numbers are indicative only and
are dependent on several factors such as the relevant territory's
income per capita, the products and applications launched, currency
strength and the size of the cardholder base.
-- Investment in the SmartSwitch: Where we participate as a shareholder in
a SmartSwitch, we contribute our share of the capital required to
establish and fund the business pro-rata to our shareholding by way of
subscribing for equity and shareholders' loans.
10. What is the status of SmartSwitch Nigeria?
In August 2007, the Central Bank of Nigeria formally approved the
SmartSwitch Nigeria banking license application to provide payment solutions
and products in the Nigerian financial markets. During the third quarter of
fiscal 2008, SmartSwitch Nigeria commenced its pilot for the UEPS service
offering in Nigeria and delivered 50,000 smart cards to Diamond Bank Limited,
SmartSwitch Nigeria's 15% shareholder.
We consolidate SmartSwitch Nigeria Limited, or SmartSwitch Nigeria, for
financial accounting purposes. This differs from the equity accounting
treatment of our investments in SmartSwitch Namibia and SmartSwitch Botswana.
11. What is the Ghana contract all about?
In June 2007, we were awarded the National Switch and Smart Card Payment
System tender by the Central Bank of Ghana. The tender was issued pursuant to
the vision of the Central Bank of Ghana to provide the Ghanaian financial
services industry access to a robust technological platform that will allow
for the switching of all existing payment instruments and introduce a new
biometrically protected smart card designed to deliver affordable financial
services to the majority of Ghanaian citizens. We believe this to be the first
time that a national electronic payment system will allow so many different
technologies to inter-operate with each other for the benefits of all
stakeholders.
The solution will be implemented during fiscal 2008 and is designed to
achieve interoperability between all the existing ATMs, POSs and teller
terminals owned by individual banks, will deploy new ATMs and POSs which will
be connected directly to the new processing system and will introduce our UEPS
smart card to be issued by the switch and all Ghanaian banks. The system will
also incorporate a card risk management applet as well as the ability to
provide biometric protection to PIN-based applications as an additional, but
independent, verification process.
Initially we expected to generate revenues of approximately $19.0 million,
excluding travel related expenditures, from our contract with the Central Bank
of Ghana during fiscal 2008, however, we have allowed the bank to procure
approximately $1.6 million of low margin hardware for its data room from local
Ghanaian suppliers. We have agreed that the bank will not be required to
reimburse us for any loss of margin and believe that this concession will
improve the already strong working relationship we have with the bank. We have
received additional hardware orders for point of service terminals and smart
cards from the Central Bank of Ghana which we expect will generate revenues of
approximately $4.7 million. We expect this additional hardware to be delivered
during the first two quarters of fiscal 2009.
We continue software development and customization activities related to
the Ghanaian National Switch and Smart Card Payment System. In addition,
hardware required in terms of the tender specifications was delivered to Ghana
during our second and third quarters of fiscal 2008. During the first quarter
of fiscal 2008, we commenced the process of integrating the Ghanaian
participating banks with the National Switch and Smart Card Payment System.
During January 2008, the Central Bank of Ghana announced that it is
mandatory for all financial institutions, including banks, community banks and
credit unions to participate in the UEPS national switch. As a result, we
anticipate that 169 different financial institutions will join the payment
system. The Central Bank of Ghana has also ordered a further 2.5 million smart
cards, 5,483 terminals, 1,338 registration workstations, 324 wage payment
workstations and have asked us to upgrade all existing ATMs in Ghana to be
UEPS-compatible. We anticipate delivery of these additional requirements
during the first two quarters of fiscal 2009.
The Ghanaian National Switch and Smart Card Payment System, or e-zwich,
was officially launched by President Kufuor on April 28, 2008 and has been
publically endorsed by him.
12. What is the Iraq contract all about?
During the third quarter of fiscal 2008, we signed a contract with a
consortium comprising the Iraqi government and local Iraqi banks for the use
of our UEPS technology in Iraq. Under the contract, we will provide a
customized UEPS banking and payment system to the consortium.
The consortium selected us as its partner to assist with the challenges
currently encountered with the payment and distribution of cash disbursements
in Iraq. It is expected that the UEPS technology will also be utilized by
Iraqi citizens living abroad, via bank branches in other countries.
The deployment of the UEPS will provide a ubiquitous platform for retail
payment transactions in Iraq by providing interoperability between ATMs, POSs
and bank branches. The UEPS technology will provide offline and online
transaction processing solutions to enable affordable products and services to
be offered to Iraqi citizens irrespective of where they reside. Projects
identified include the payment of social grants to war victims, employee
salary/wage payments, banking products and financial services. The first
project will pilot the solution for the distribution of social grant payments
to war victims.
We expect to commence the pilot in the fourth quarter of fiscal 2008 and
we expect to generate revenue in the first quarter of fiscal 2009. Under the
agreement, we will receive ongoing transaction and license fees, as well as
payments for the provision of outsourcing services and the sale of hardware.
13. What territories are currently being targeted and how long is the
sales cycle?
We target any developing economy where the advantages of our payment
system are obvious and in demand. The sales cycle in any new territory,
although very difficult to predict, generally spans several months (in some
cases, years) as a myriad of factors need to be considered, such as the
corporate regulatory environment, central bank requirements, tax regimes,
compilation of business plans, etc. Our strategic goal is to enter and
introduce our UEPS technology in at least four new territories, of any size,
during a twelve month period.
14. 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.
Our business in Colombia has demonstrated the following growth since
August 2007:
Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Mar-08
Revenues
(COP '000) 24,740 62,166 82,243 94,126 111,462 118,073 153,191 273,177
Percentage
growth
(month on
month) - 151% 32% 14% 18% 6% 30% 78%
Number of
trans-
actions 4,352 12,795 16,746 18,765 20,498 22,999 29,937 43,992
Percentage
growth
(month on
month) - 194% 31% 12% 9% 12% 30% 47%
The average exchange rate during the eight months ended March 31, 2008 was
US$ 1: COP 2,022.
15. 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.
16. Why is the Net1 Financial Services segment constantly declining in
revenue and profit?
We offer the UEPS-based loans to our beneficiaries with the primary
purpose of assisting them to repay expensive loans with other loan providers
and to escape the debt spiral that they are trapped in. Once our UEPS-based
loans are repaid, we believe that the beneficiaries have an enhanced ability
to remain debt-free, or take loans in amounts smaller than the original
refinancing facility we offered to them. We believe that once cardholders
escape the debt spiral they will have more disposable income to spend,
including through our merchant acquiring base.
Revenues from our traditional microlending business decreased during the
quarter due to increased competition, our strategic decision not to grow this
business, and an overall lower return on traditional microlending loans as a
result of compliance with the National Credit Act, or NCA.
The NCA regulates fees and interest charged on micro-lending loans and
imposes credit check obligations on lenders prior to granting of credit to
individuals.
17. 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. In addition, through our
merchant acquiring system, we may also pre-fund social welfare grants in the
provinces where we operate. These obligations result in a peak funding
requirement, on a monthly basis, of approximately $41.5 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.
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.
18. How are you growing the management team?
During the last year, we made significant progress in strengthening the
Net1 management team. Our acquisition of Prism provided us with a pool of IT
professionals who have been integrated into the Net1 research and development
environment and we now have approximately forty IT professionals who are
working full time on the enhancement, customization and maintenance of our
UEPS flagship. We have also appointed senior Prism managers to oversee our
in-house legal function as well as our Easypay, cryptography, VTU, SIM card
development and production activities.
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 appointed a 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.
19. What is the status of your share buy-back program?
On May 17, 2007, we announced a share buy-back program for the repurchase
of up to $50 million of the Company's common stock at any time and from time
to time through June 30, 2008. To date, we have repurchased 40,100 shares of
our common stock.
20. 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. The future dividend policy of our main operating
subsidiary, Net1 Applied Technologies South Africa Limited, also has to comply
with the restrictions placed by the South African Reserve Bank as a condition
of its approval of the 2004 Aplitec transaction. These restrictions will apply
until such time as all of our special convertible preferred stock has been
converted into common stock. These restrictions are described in our SEC
filings.
21. 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% and the second
phase, expected in calendar 2008 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. On January 8, 2008, the
Revenue Laws Second Amendment Act (Act 36 of 2007), or the Revenue Laws Act,
was promulgated. The Revenue Laws Act included the legislation to reduce the
rate of STC from 12.50% to 10.00%, effective October 1, 2007. As a result our
fully distributed tax rate was reduced to 35.45% from 36.89% during the third
quarter of fiscal 2008.
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 35.45% to
29%. Under GAAP, we apply the fully distributed tax rate of 35.45% to our
deferred taxation assets and liabilities. We have not yet determined whether
we would qualify for the treaty relief available to foreign shareholders.
Included in our earnings for the three and nine months ended March 31,
2008, is deferred income tax expense of approximately $1.9 million and
$6.4 million (ZAR 14.1 million and ZAR 45.6 million), respectively, related to
the application of the fully distributed rate of 35.45% compared with the
South African statutory rate of 29% to our Income before income taxes. The
following table illustrates the effect on our March 31, 2008, income tax
expense, earnings per share and net deferred tax liability as if the second
phase described above had been enacted on July 1, 2007:
Three months ended
March 31, 2008
Illustrative
Actual effect(1)
Fully distributed tax rate 35.45% 29.00%
Income tax expense before change in fully
distributed tax rate $11,075 $9,132
Reduction in income tax expense resulting
from change in fully distributed rate
during the third quarter of fiscal 2008 (5,919) -
Income tax expense $5,156 $9,132
Earnings per share, in U.S. cents 47 50
Net deferred tax liability as at $29,191 $5,153
March 31
Nine months ended
March 31, 2008
Illustrative
Actual effect(1)
Fully distributed tax rate 35.45% 29.00%
Income tax expense before change in fully
distributed tax rate $33,213 $26,830
Reduction in income tax expense resulting
from change in fully distributed rate
during the third quarter of fiscal 2008 (5,397) -
Income tax expense $27,816 $26,830
Net deferred tax liability reversal to net income(2) - $28,034
Earnings per share, in U.S. cents 114 125
Net deferred tax liability as at March 31 $29,191 $5,153
(1) Illustrates the abolishment of STC had this been enacted on July 1,
2007. Accordingly, the fully distributed rate decreases from 36.89% (effective
as at July 1, 2007) to 29%. All South African deferred tax assets and
liabilities would then be measured at 29% which would result in a reversal of
a portion of the net deferred tax liabilities recognized.
(2) The net deferred tax liability reversal to net income represents the
portion of the net deferred tax liability rate adjustment as of June 30, 2007
translated at rates applicable as of June 30, 2007 assuming the fully
distributed tax rate is 29%.
As discussed above, we can not reasonably determine whether, or when, the
phase two amendments will be enacted as proposed and what the ultimate effect
on our reported earnings will be.
22. What effect will the change in the statutory rate of taxation for
South African domiciled companies from 29% to 28% have on your fully
distributed tax rate?
On February 20, 2008, the Finance Minister of South Africa announced the
decrease in statutory rate of taxation for South African domiciled companies
from 29% to 28% for all fiscal years ending on or after April 1, 2008. Once
enacted, our fully distributed tax rate will be reduced from the current rate
of 35.45% to 34.55% for our South Africa domiciled subsidiaries.
Once the rate has been reduced to 28%, and if STC is abolished, the
effective tax rate for our South African domiciled subsidiaries will be 28%.
SOURCE Net 1 UEPS Technologies, Inc.
