Legal costs eat into Net1 earnings
Net1 UEPS Technologies, a provider of alternative payment systems, says that despite a third quarter loss of nearly $4.7-million, it remains optimistic about its future.
A company spokesman noted that during the third quarter, Net1 incurred legal costs of more than $4.2 million related to investigations by US authorities, and made provision for a $2.3 million bad debt related to an Iraqi customer contract that was not renewed.
Net1 is currently being investigated by the US Department of Justice (DOJ) Criminal Division and the SEC, regarding possible acts of corruption in South Africa.
“Excluding those non-regular costs, Net1’s business is fundamentally strong and moving forward,” said spokesman David Barritt. He said that the company had focused intensively on the efficient implementation of its government contract to pay social grants and pensions across South Africa.
“This has been a huge success,” he said, “By the end of April this year, Net1’s subsidiary, Cash Paymaster Services (CPS) had registered over 20 million beneficiaries and issued more than 9.1 million Sassa (South African Social Security Agency) smartcards.”
Net1, through CPS, manages and distributes social grants in South Africa, having been awarded a R10 billion contract by Sassa.
Net1 said that CPS has substantially completed the bulk enrollment phase of its government contract, however, profitability was adversely impacted by the registration of substantially more beneficiaries than originally planned.
The company said that the enrollment of additional beneficiaries does not produce revenue for the company; revenue is earned from the distribution of grants to individual cardholders.
“This extra work, meant extra staff and additional logistical challenges,” explained Barritt. “CPS’s temporary labour force rose from 2,500 to around 5,500 for nearly six months, before declining to around 3,000 people at the end of April.”
Performance from Net1’s other subsidiaries was good, it said. Revenues from the company’s international transaction-based activities grew by 17%, largely on the strength of strong performance from Korean subsidiary KSNET – a leading payment processor in Korea.
Net1’s hardware, software and related technology sales grew by 40%, as a result of an increase in royalty fees and ad hoc hardware sales.
Looking ahead, Barritt said that the indicators are positive.
CPS was awarded the SA grants tender in January 2012; however, rival bidder and Absa subsidiary Allpay, claimed the process to be illegal and invalid citing corruption.
He said that a full bench of the Supreme Court had dismissed every single one of losing bidder, AllPay’s complaints against Net1 and had delivered AllPay a stinging rebuke saying that “smear and innuendo” have no place in the courts.
Net1 noted that AllPay is now attempting to have the matter heard in the Constitutional Court, with Net1 and Sassa opposing the application. The Constitutional Court is yet to decide if it will hear AllPay’s application.
Barritt said the US investigation has still to wind its course and Net1 is cooperating with the US authorities. “Obviously, the attempt by AllPay to prolong legal proceedings has a negative impact; they are damaging Net1’s reputation and affecting its ability to execute certain aspects of its strategic plan.”
Net1 is also being invested by the Hawks. “The company has provided certain electronic information to the Hawks at their request and it will cooperate with the Hawks in their investigation,” Net1 said.
“The corruption allegations were never supported by a single shred of evidence,” said Barritt, “but, as can be seen from the quarterly results, they caused great financial and reputational harm to the company. Those who made the allegations will now have to contend with the consequences of the criminal investigation.”
Barritt said that Net1 is suing AllPay on the basis that AllPay injured its reputation and unfairly caused its share price to drop. Net1 is seeking damages of R478 million, plus interest and legal costs. The damages claimed may increase as Net1 quantifies the continued impact of AllPay’s actions.
More on Net1
Absa’s Allpay heads to the constitutional court
Net1 wins supreme court case over Absa
Court grants leave to appeal in Sassa case
Net1 set for legal action against AllPay
Net1 shares slump 55% on corruption probe
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