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NET 1 UEPS TECHNOLOGIES INC - Short-Form Announcement: Net 1 UEPS Technologies, Inc. Reports Second Quarter 2020 Results

Release Date: 07/02/2020 07:05
Code(s): NT1     PDF:  
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Short-Form Announcement: Net 1 UEPS Technologies, Inc. Reports Second Quarter 2020 Results

Net 1 UEPS Technologies, Inc.
Registered in the state of Florida, USA
(IRS Employer Identification No. 98-0171860)
Nasdaq share code: UEPS
JSE share code: NT1
LEI: 529900J4IZMWV4RDEB07
ISIN: US64107N2062
(“Net1” or “the Company”)

Short-Form Announcement: Net 1 UEPS Technologies, Inc. Reports Second Quarter 2020 Results

Q2 2020 Highlights:
    - Revenue of $74.1 million, GAAP EPS of $(0.00) and Fundamental EPS of $(0.10);
    - Operating loss of $(6.9) million and adjusted negative EBITDA of $(0.7) million;
    - Signed agreement to sell KSNET for $237 million and disposed of FIHRST for $11.7 million;
    - Board replenished share repurchase authorization to $100 million from $53 million.

“The sale of KSNET marks an important milestone in the reinvention of Net1 as a fintech company focused on the underbanked, as
it allows us to inject the appropriate liquidity in our businesses in order to scale our operations in South Africa, Africa and Europe,
while also being able to return significant capital to our shareholders,” said Herman Kotzé, Net1’s CEO. “We expect to commence
our reinvestment into South Africa during Q4 2020 and should be able to demonstrate tangible improvements as soon as the first half
of fiscal 2021,” he concluded.

“Given the timing of our various corporate actions and availability of liquidity as well as certain pending European regulatory
approvals, there are a number of moving parts in our business this year. Using the same assumption of a constant currency base of
ZAR 14.27/$1, we believe fiscal 2020 adjusted EBITDA is likely to be a loss of approximately $3 million, a decrease from our
previously announced guidance of $16 million. This decrease is primarily due to an $11 million reduction related to foregone
contributions as a result of the sale of KSNET and FIHRST, as well as an $8 million negative impact related to the delayed liquidity
injection in South Africa due to the timing of our asset realizations, and IPG’s inability to launch its new products due to the
dependencies on Visa’s certification,” said Alex Smith, Net1’s CFO. “Our focus following the injection of liquidity during Q4 2020
will be to drive new account growth and financial services in South Africa, and commence with the scaling up of our new initiatives
in Europe, in turn, returning the group to a positive adjusted EBITDA position in fiscal 2021,” he concluded.
Sale of KSNET
On January 27, 2020, we agreed to sell 100% of KSNET, Inc. (“KSNET”), a leading Republic of Korea (“South Korea”) payment
processor, to PayletterHoldings LLC for approximately $237 million. The transaction, which is not subject to a financing condition,
is expected to close in March 2020.
Replenishment of repurchase authorization back to $100 million
On February 5, 2020, our Board of Directors replenished the authorization to repurchase up to $100 million of our common shares.
The authorization does not have an expiration date. The share repurchase authorization will be used at management’s discretion,
subject to legal requirements and price and other internal limitations established by our board of directors. Repurchases will be
funded from our available cash reserves. Share repurchases may be made through open market purchases, privately negotiated
transactions, or both. There can be no assurance that we will purchase any shares or any particular number of shares. The
authorization may be suspended, terminated or modified at any time for any reason, including market conditions, the cost of
repurchasing shares, liquidity and other factors that management deems appropriate.
Succession plan for Chairman
On February 5, 2020, our Chairman, Mr. Christopher S. Seabrooke, advised us that he will resign from his position as a member of
our board of directors and all committees of the board, effective June 30, 2020. The board appointed Mr. Paul Edwards, one of our
independent directors, to succeed Mr. Seabrooke as our Chairman effective June 30, 2020.
Summary Financial Metrics

                                                                                      Q2 ’20 vs   Q2 ’20 vs    Q2 ’20 vs    Q2 ’20 vs
                                                 Q2 2020    Q2 2019     Q1 2020          Q2 ’19      Q1 ’20       Q2 ’19       Q1 ’20
(All figures in USD ‘000s except per share                USD ‘000’s
data)                                              (except per share data)                 % change in USD          % change in ZAR
Revenue                                           74,080     77,442      80,756            (4%)        (8%)        (2%)          (9%)
GAAP operating loss                              (6,854)   (48,901)     (2,734)           (86%)        151%       (86%)         148%
                              (1)
Adjusted (negative) EBITDA                         (703)   (33,219)       2,837           (98%          nm        (98%)           nm
GAAP (loss) earnings per share ($)                (0.00)     (1.13)      (0.08)          (100%)       (95%)       (100%)        (96%)
 Continuing                                       (0.00)     (1.16)      (0.08)          (100%)       (95%)       (100%)        (96%)
 Discontinued                                         -       0.03           -              nm          nm           nm           nm
                                 (1)
Fundamental loss per share ($)                    (0.10)     (0.90)      (0.02)           (89%)        400%        (89%)         395%
Fully-diluted shares outstanding (‘000’s)         56,568     56,855      56,568            (1%)           -           nm           nm
Average period USD/ ZAR exchange rate              14.60      14.32       14.75              2%         (1%)          nm           nm
  
                                                                                                               F2020 vs      F2020 vs
                                                                                       F2020         F2019        F2019         F2019
                                                                                            USD ‘000’s         % change      % change
(All figures in USD ‘000s except per share data)                                     (except per share data)     in USD        in ZAR
Revenue                                                                                154,836     184,539        (16%)         (16%)
GAAP operating loss                                                                    (9,588)     (53,187)       (82%)         (82%)
                              (1)
Adjusted (negative) EBITDA                                                               2,134     (28,098)          nm           nm
GAAP (loss) earnings per share ($)                                                      (0.08)       (1.22)       (93%)         (93%)
 Continuing                                                                             (0.08)       (1.28)       (94%)         (94%)
 Discontinued                                                                                -         0.06          nm           nm
Fundamental loss per share ($)(1)                                                       (0.12)       (0.88)       (86%)         (86%)
Fully-diluted shares outstanding (‘000’s)                                               56,568       56,814        (0%)           nm
Average period USD/ ZAR exchange rate                                                    14.40        14.34          0%           nm

(1) Adjusted (negative) EBITDA and fundamental loss per share are non-GAAP measures and are described below under “Use of Non-GAAP
Measures”. See Attachment B in our full announcement for a reconciliation of GAAP operating (loss) income to negative EBITDA and Adjusted
negative EBITDA, and GAAP net (loss) income to fundamental net (loss) income and (loss) earnings per share.

Factors impacting comparability of our Q2 2020 and Q2 2019 results

    -    Decline in revenue: Our revenues declined 2% in ZAR primarily due to the significant decline in EPE account numbers
         driven by SASSA’s auto-migration of accounts to SAPO, and a reduction in EPE-related financial and value-added services
         and transaction fees due to a smaller customer base, but partially offset by higher ad hoc terminal and prepaid airtime sales;
    -    Ongoing operating losses: We continue to experience operating losses primarily in South Africa as a result of lower
         revenues, coupled with a high-fixed cost infrastructure;
    -    Gain on disposal of FIHRST: We recorded a gain of $9.7 million related to the disposal of FIHRST in December 2019;
    -    Higher net interest expense: Net interest expense increased due to lower average cash balances and higher short-term
         borrowing to fund ATMs and utilization of our overdrafts, but was partially offset by the repayment of our long-term debt
         in the second half of fiscal 2019; and
    -    Adverse foreign exchange movements: The U.S. dollar appreciated 2% against the ZAR and 4% against the KRW during
         Q2 2020, which adversely impacted our reported results.

Results of Operations by Segment and Liquidity

South African transaction processing
Segment revenue was $20.4 million in Q2 2020, down 6% on a constant currency basis compared with Q2 2019 but up from $19.4
million in Q1 2020. The decrease in segment revenue was primarily due to fewer transactions performed at our ATM base and lower
fees as a result of fewer EPE and SASSA accounts. Our South African transaction processing operating segment revenue and
operating loss have been adversely impacted by the loss of EPE customers as a result of SASSA’s auto-migration of accounts to
SAPO. The reduced operating loss in the segment is due to the cost cutting that has occurred over the last 12 months. Our operating
loss margin for Q2 2020 and 2019 was (14.6%) and (53.8%), respectively.

International transaction processing
Segment revenue was $34.4 million in Q2 2020, down 8% on a constant currency basis compared with Q2 2019 and up from $34.0
million in Q1 2020. Segment revenue was lower during Q2 2020, primarily due to an ongoing contraction in IPG transactions
processed, specifically meaningfully lower crypto-exchange and China processing activity, modestly lower KSNET revenue as a
result of lower transaction values processed and the impact of the weaker KRW/ USD exchange rate on reported KSNET revenue.
Operating income in Q2 2020 has improved compared with Q2 2019 due to improved profitability of KSNET and the impairment
loss recorded in Q2 2019. Operating income (loss) margin for the second quarter of fiscal 2020 and 2019 was 8.2% and (10.6%),
respectively. Excluding the goodwill impairment, segment operating income and margin for Q2 2019 were $3.0 million and 7.8%,
respectively.

Financial inclusion and applied technologies
Segment revenue was $22.0 million in Q2 2020, up 18% on a constant currency basis compared with Q2 2019 but down from
$30.1 million in Q1 2020. Segment revenue increased primarily due to higher ad hoc terminal and prepaid airtime sales, partially
offset by lower lending revenue as a result of a moderate contraction in our lending book and lower insurance revenue as a result of
fewer customers, and a decrease in inter-segment revenues. Excluding the impact of the allowance for doubtful finance loans
recorded in Q2 2019, the operating loss from continuing operations for Q2 2020 was better than Q2 2019 due to the contribution
from the ad hoc terminal and airtime sales. Operating income during Q2 2019 was significantly impacted by an allowance for
doubtful finance loans receivable of $23.4 million (ZAR 335.1 million). Operating income margin from continuing operations for
the Financial inclusion and applied technologies segment was (4.0%) and (141.6%) during Q2 2020 and 2019, respectively.

Corporate/eliminations
Our corporate expenses decreased primarily due to lower acquired intangible asset amortization expense related to intangible assets
that were fully amortized during fiscal 2019, partially offset by higher transaction-related expenditures.

Cash flow and liquidity
At December 31, 2019, our cash and cash equivalents were $50.7 million and comprised of KRW-denominated balances of KRW
36.2 billion ($31.3 million), ZAR-denominated balances of ZAR 197.0 million ($14.0 million), U.S. dollar-denominated balances of
$1.8 million, and other currency deposits, primarily Botswana pula, of $3.6 million, all amounts translated at exchange rates
applicable as of December 31, 2019. The increase in our unrestricted cash balances from June 30, 2019, was primarily due to
utilization of our short-term borrowings and repayment of a loan outstanding by DNI, which was partially offset by weaker trading
activities, capital expenditures, and an additional investment in V2.

Excluding the impact of interest received, interest paid under our South Africa debt and taxes, the increase in cash provided is
primarily due to the repayment of finance loans receivable at the end of December 2019. These finance loans receivable are typically
settled at the beginning of the new month (in this case January 2020) but were settled in December 2019, due to the opening of the
January 2020 grant distribution file in December 2019. Capital expenditures for Q2 2020 and 2019 were $0.8 million and $2.5
million, respectively, and Q2 2020 capital expenditures relate primarily to the acquisition of processing equipment in South Korea to
maintain operations.

Use of Non-GAAP Measures
U.S. securities laws require that when we publish any non-GAAP measures, we disclose the reason for using these non-GAAP
measures and provide reconciliations to the directly comparable GAAP measures in our full announcement. The presentation of
EBITDA, adjusted EBITDA, fundamental net (loss) income and fundamental (loss) earnings per share and headline (loss) earnings
per share are non-GAAP measures.

Headline (loss) earnings per share (“H(L)EPS”)
The inclusion of H(L)EPS in this press release is a requirement of our listing on the JSE. H(L)EPS basic and diluted is calculated
using net (loss) income which has been determined based on GAAP. Accordingly, this may differ to the headline (loss) 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.

The table below presents our H(L)EPS for the second quarter of fiscal 2020 and 2019, respectively, and the year to date fiscal 2020
and 2019, respectively:

                                                                                     Q2        Q2
                                                                                   2020      2019       F2020      F2019
Net loss used to calculate headline earnings (USD’000) .                        (9,983)   (55,850)   (14,486)   (61,141)
Headline loss per share: ...................................................
   Basic, in USD ............................................................    (0.18)     (0.98)     (0.26)     (1.08)
   Diluted, in USD .........................................................     (0.18)     (0.98)     (0.26)     (1.08)

Short-form announcement

This short-form announcement is the responsibility of the Net1’s Board of Directors (“Board”) and the contents have been approved
by the Board on February 6, 2020. This short-form announcement released on SENS is a summary of the full announcement which
has been published at https://senspdf.jse.co.za/documents/2020/JSE/ISSE/NT1/Q2Res20.pdf and on Net1’s website at
www.net1.com. This short-form announcement does not contain complete or full announcement details. Any investment decision by
investors and/or shareholders should be based on consideration of the full announcement. The short-form announcement has not
been audited or reviewed by Net1’s external auditors. The full announcement is available upon request through enquiries directed to
either Net1’s Group Vice President, Investor Relations at dchopra@net1.com or Net1’s media relations contact at
Bridget.vonholdt@bcw-global.com.

Conference Call
We will host a conference call to review these results on February 7, 2020, at 8:00 a.m. Eastern Time. To participate in the call, dial
1-508-924-4326 (US and Canada), 0333-300-1418 (U.K. only) or 010-201-6800 (South Africa only) ten minutes prior to the start of
the call. Callers should request “Net1 call” upon dial-in. The call will also be webcast on the Net1 homepage, www.net1.com. Please
click on the webcast link at least ten minutes prior to the call. A webcast of the call will be available for replay on the Net1 website
through March 1, 2020.

About Net1
Net1 is a leading provider of transaction processing services, financial inclusion products and services and secure payment
technology. Net1 operates market-leading payment processors in South Africa and the Republic of Korea. Net1 offers debit, credit
and prepaid processing and issuing services for all major payment networks. In South Africa, Net1 provides innovative low-cost
financial inclusion products, including banking, lending and insurance and through DNI is a leading distributor of mobile subscriber
starter packs for Cell C, a South African mobile network operator. Net1 leverages its strategic equity investments in Finbond and
Bank Frick (both regulated banks), and Cell C to introduce products to new customers and geographies.

Net1 has a primary listing on NASDAQ (NasdaqGS: UEPS) and a secondary listing on the Johannesburg Stock Exchange (JSE:
NT1). Visit www.net1.com for additional information about Net1.

Forward-Looking Statements
This press release contains forward-looking statements that involve substantial risks and uncertainties. All statements, other than
statements of historical fact, included in this press release regarding strategy, future operations, future financial position, future
revenues, projected costs, prospects, plans and objectives of management are forward-looking statements. The Company may not
actually achieve the plans, intentions or expectations disclosed in its forward-looking statements. Actual results or events could
differ materially from the plans, intentions and expectations disclosed in the forward-looking statements that the Company makes.
Factors that might cause such differences include, but are not limited to: the Company failing to close the KSNET sale transaction,
failing to achieve the Company’s expected levels of liquidity, receiving favorable pending European regulatory approvals, achieving
the levels of EBITDA expected, as well as other factors, many of which are beyond the Company’s control; and other important
factors included in the Company’s reports filed with the Securities and Exchange Commission, particularly in the “Risk Factors”
section of the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2019, as such Risk Factors may be
updated from time to time in subsequent reports. The Company does not assume any obligation to update any forward-looking
statements, whether as a result of new information, future events or otherwise.

Investor Relations Contact:
Dhruv Chopra
Group Vice President, Investor Relations
Phone: +1 917-767-6722
Email: dchopra@net1.com

Media Relations Contact:
Bridget von Holdt
Business Director – BCW
Phone: +27-82-610-0650
Email: Bridget.vonholdt@bcw-global.com

Johannesburg
February 7, 2020

Sponsor:
Rand Merchant Bank, a division of FirstRand Bank Limited

Date: 07-02-2020 07:05:00
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