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Why Shares of Net 1 UEPS Technologies Inc. Tumbled Today

By Timothy Green – Aug 30, 2018 at 12:22PM

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The end of a major contract led to a steep earnings decline.

What happened

Shares of Net 1 UEPS Technologies Inc. (UEPS -3.66%) slumped Thursday after the payment solutions and transaction processing services provider reported preliminary fourth-quarter results. Both revenue and earnings declined as the company completed what it called "a turbulent year." The stock was down about 16.6% at 11:15 a.m. EDT.

So what

Net 1 reported fourth-quarter revenue of $149.2 million, down 4% year over year in U.S. dollars and down 16% year over year in South African Rand. In its earnings release, the company explained some of the decline: "We achieved this result despite the deferral of significant revenue related to Q4 activities under our SASSA contract, until we receive pricing confirmation from the Constitutional Court."

A falling chart overlayed on a screen of numbers.

Image source: Getty Images.

Net 1 was awarded its contract with the South African Social Security Agency, or SASSA, in 2012. CPS revenue plunged 81% in the fourth quarter due to the phase-out period of the SASSA contract, which is scheduled to terminate on Sept. 30.

Fundamental earnings per share, a non-GAAP figure, came in at $0.22, down from $0.41 in the prior-year period. A significant loss in the CPS business due to the phase-out of the SASSA contract contributed to the earnings decline.

Now what

"While many investors have been concerned that the end of this relationship would severely impact our other South African businesses, I can happily point to our solid Q4 we achieved despite a nearly 80% decline at CPS, as well as our guidance for fiscal 2019," said Net 1 CEO Herman Kotze. "Furthermore, the elimination of the negative impact that this contract has had on our business, management's time and shareholder value, should provide a meaningful lift to product refinement and R&D going forward."

Net 1 expects to produce fundamental EPS of at least $1.05 in fiscal year 2019, with no contribution from CPS. That's down from $2 in fiscal year 2018.

With profits plunging and guidance calling for an even bigger decline next year, the market punished the stock. Net 1 will need to show that it can return to growth absent the SASSA contract over the next few years.

Timothy Green has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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