NetSol Technologies, Inc. (NTWK) Earnings Call Transcript & Summary

Good morning, and welcome to the NetSol Technologies' Fiscal First Quarter 2023 Earnings Conference Call. On the call today are Najeeb Ghauri, Chairman and Chief Executive Officer; Roger Almond, Chief Financial Officer; and Patti McGlasson, General Counsel. I would like to turn the call over to Patti McGlasson, who will provide the necessary cautions regarding the forward-looking statements made by management during this call. Please proceed.

Good morning, everyone, and thank you for joining us. Following a review of the company's business highlights and financial results, we will open the call for questions. I'll now provide the necessary cautions regarding the forward-looking statements made by management during this call. Please note that all the information discussed on today's call is covered under the safe harbor provisions of the Private Securities Litigation Reform Act. The company's discussion may include forward-looking statements reflecting management's current forecast of certain aspects of the company's future and our actual results could differ materially from those stated or implied. These forward-looking statements are qualified by the cautionary statements contained in NetSol's press releases and SEC filings, including our annual report on Form 10-K and quarterly reports on Form 10-Q. I would also like to point out that we will be discussing certain non-GAAP measures. The press release issued earlier today contains a reconciliation of these non-GAAP financial results to their most comparable GAAP measures. Finally, I would like to remind everyone that this call will be recorded and made available for replay at www.netsoltech.com and via link available in today's press release. Now I'd like to turn the call over to Najeeb. Najeeb?

Thank you, Patti, and good morning, everyone. In the first quarter, we capitalized on the strong momentum built over the course of the past year. A few key takeaways from the quarter. One, as an international company, like many companies, we saw the impact of currency swings in the quarter. So it is important to look at the results on a constant currency basis. For the quarter, we drove a 15.6% revenue increase on a constant currency basis. Two, a key focus of ours has been to drive long term growth in our recurring revenues specifically SaaS and support. This grew 15.6% in the quarter, a bit faster than consolidated revenue. Three, we invested in our people and our growth. We have many exciting growth initiatives that we will get into. But importantly, we need the best people to make that happen. We saw SG&A increase and investing in our people is one of the key reasons for this, inflation also added to our costs. That said, making sure our people are motivated as critical for long-term shareholder value. Over time, as the business continues to scale, we should be able to drive considerable profitability. Number four, much of our business is very long-term contracts, and we continue to build upon this aspect of the business in the quarter. Looking forward, our pipeline is encouraging on this front. And five, our balance sheet is a real competitive asset for us. We do not have a need for capital and have a large cash position that enables us to make take a long-term view of the business. So even with economic uncertainty, our recurring revenues, long-term contracts and robust pipeline, coupled with our strong cash and liquidity position, put us in a very strong position. Within our core business, the pipeline and mix of opportunities remains robust, particularly in our European and North American growth markets, giving us confidence in our ability to drive additional contract signings over the coming months. Within our more venture-focused operations, the continued rollout of the Otoz Digital Retail Platform in partnership with MINI Anywhere has been a resounding early success. Now with 38 dealerships, 10 additional after the close of this quarter Q1, subscribed in 15 U.S. states. This success validates our confidence in this platform as well as providing monthly SaaS subscription revenue of approximately $100,000. In addition to this early success, Otoz has signed a contract with a Tier 1 automotive company in the U.S. for our mobility solution to manage back-office operations for vehicle subscriptions. Across the company, we have expanded our footprint by opening a new office in Tianjin, China, to support both the ongoing delivery operations as well as the professional services vertical growth in China. In Pakistan, China and in the U.S., we have hired to not only expand our opportunities and increased sales efforts but to fulfill implementation and delivery needs of current and new customers. We are confident that the investments we have made in our leadership, workflows, technology and expanded sales efforts will bear fruit. With that overview completed, I'll now hand the call over to our CFO, Roger Almond, who will walk you through the financial results of the quarter. Roger?

Thanks, Najeeb. Turning to our fiscal first quarter 2023 financial results for the period ended September 30, our total net revenues for the first quarter of fiscal 2023 were $12.7 million compared with $13.4 million in the prior year period. The decrease in total net revenues was driven by the devaluation of the foreign currencies compared to the U.S. dollar. On a constant currency basis, net revenues increased 15.6% to $15.5 million. The increase in revenues on a constant currency basis was driven by an increase in license fees of $314,000, and an increase in subscription and support revenues of $1 million, and an increase in services revenue of $753,000. Recurring revenue or subscription and support revenues were $6 million. On a constant currency basis, this revenue grew 16.6% to $7.3 million compared with $6.2 million in the prior year period. The increase in total subscription and support revenues for the year was a result of several customers who went live with our product in fiscal 2022. We anticipate subscription and support revenue to gradually increase as we implement both our NFS legacy product and our NFS Ascent product. Total service revenues were $6.4 million and on a constant currency basis were $7.9 million compared with $7.2 million in the prior year period. The increase in services revenue for the quarter on a constant currency basis was due to an increase in service revenue for an ongoing customers implementation in China. Services revenue is derived from services provided to both current customers as well as services provided to new customers as part of the implementation process. Total cost of revenues was $8.5 million for the first quarter, an increase of $500,000 from $8 million in the first quarter of 2022. And on a constant currency basis, total cost of revenues was $10.8 million or an increase of $2.8 million. The increase in cost of sales for the quarter on a constant currency basis, primarily due to increases in salaries and consultant fees of $2.1 million, travel costs of $293,000, depreciation of $121,000 and other costs of $350,000. Gross profit for the first quarter of fiscal 2023 was $4.3 million or 33.5% of net revenues compared to $5.4 million or 40.6% of net revenues in the first quarter of fiscal 2022. On a constant currency basis, gross profit was $4.7 million. The decrease in gross profit on a constant currency basis was primarily due to increases in cost of revenues of $2.8 million, offset by a $2.1 million increase in revenues on a constant currency basis. Operating expenses for the first quarter were $6.1 million or 48.4% of sales compared to $6.1 million or 45.3% of sales in the same period last year. On a constant currency basis, operating expense for the first quarter were $7.4 million or 47.6% of sales. The increase of operating expenses on a constant currency basis for the quarter was primarily due to increases in selling and marketing expenses of $513,000, general and administrative expenses of $438,000 and research and development costs of $347,000. Turning to our profitability metrics. For the first quarter of fiscal 2023, we had a net loss from operations of $1.9 million, and on a constant currency basis, a net loss of $2.7 million compared to a net loss of $640,000 in Q1 last year. Our GAAP net loss attributable to NetSol for the first quarter fiscal 2023 totaled $621,000 or $0.06 per diluted share. And on a constant currency basis, our net loss totaled $912,000 or $0.08 per diluted share. This compares with GAAP net income of $188,000 or $0.02 per diluted share in the first quarter of last year. The decrease in GAAP net income attributable to NetSol for the quarter was primarily a result of cost to support revenues increasing at a greater rate than the increases in revenues. As I mentioned on previous calls, it's important to point out that included in our net loss this quarter was a gain of $1.3 million on foreign currency exchange transactions, and on a constant currency basis, $1.8 million compared to a gain of $1.3 million in Q1 of last year. Because we operate in several geographical regions, a significant portion of our business is conducted in currencies other than the U.S. dollar. A decrease in the value of the U.S. dollar compared to foreign currency exchange rates generally has an effect of increasing our revenues, but also increases our expenses denominated in currencies other than the U.S. dollar. Similarly, as the U.S. dollar gains strength relative to foreign currency exchange rates, it tends to reduce our revenues, but it also reduces our expenses denominated in currencies other than the U.S. dollar. We plan our business accordingly by developing -- by deploying additional resources to areas of expansion while continuing to monitor our overall expenditures, given the economic uncertainties of our target markets. Moving to our non-GAAP metrics. Our non-GAAP adjusted EBITDA for the first quarter of fiscal 2023 totaled a negative $28,000 or $0.00 per diluted share, and on a constant currency basis, a negative $136,000 or $0.01 per diluted share compared with non-GAAP adjusted EBITDA of $770,000 or $0.07 per diluted share in the first quarter of last year. Please see the reconciliation schedules contained in our earnings release for our revised calculations of adjusted EBITDA for the quarters ended September 30, 2022 and 2021. Turning to our balance sheet. At the quarter end, we had cash and cash equivalents of approximately $21 million or approximately $1.86 per diluted common share. Total NetSol stockholders' equity at September 30, 2022, was $42.1 million or $3.73 per share. That concludes my prepared remarks. I'll now turn the call back over to Najeeb for an overview of our business updates. Najeeb?

Thank you, Roger. I'll now take a minute to provide updates within the major components of our growth strategy. We are seeing a return to sales growth with a related increase in expenses to support our increased business activity. Our cash position remains healthy, providing additional resources to support our core business as well as strategic investment in high-return, long-term opportunities, including our work in the Otoz innovation lab. We are cautiously optimistic for our growth overall on a constant currency basis, but are cognizant of the macro and microeconomic challenges facing the world. We hope to be in a better position to provide some financial guidance when we announce second quarter 2023. With that said, we anticipate continuous and double-digit revenue growth of annual recurring revenue in SaaS and support services. Moving on the second component of our strategy. We are innovating in new areas and looking to create partnerships with technology and personnel, which can be a major benefit to other organizations as well as our own. To this end, I'd like to take some time to provide a brief update on our progress within the Otoz innovation lab. Recent traction in the U.S. through Otoz offering has provided excellent validation of NetSol's commitment to innovation, the MINI Anywhere program, powered by Otoz Digital retailing suite has now been adopted by 38 MINI dealers across 15 states, which includes 10 additional enrollments post Q1. At the end of Q1, monthly SaaS subscription and services revenue grew to just over $75,000 with 28 dealers live on the platform. And with the 38 dealerships, enrollment today, monthly recurring revenue reaches approximately $100,000. One of the main catalysts for the continued adoption and buy-in from MINI USA and dealership is the blended 1:5 lead conversion ratio that MINI Anywhere has achieved. Meaning, for every 5 opportunities, we have identified through the platform, one of those leads will convert to a vehicle sale. This is proof that despite recent inventory shortages, e-commerce for big ticket purchases is a necessity for the next generation of consumers. Another factor that has been a key to the platform's success is the continuous addition of new features, primarily driven by understanding dealer and customer needs through data we derive from analytics, user forums, interviews, surveys and market research. In the most recent update, several enhancements were added, including chat capability, allowing customers and dealers to communicate directly in-app and enhance sales enablement tools, allowing dealers to send recommended vehicles and personalized deal structures as deep links for customers to transact on seamlessly. These features, together, cater to more dynamic sales interactions that blends physical and digital touch points and facilitates the upselling of add-on products or negotiation of deal terms. As we progress in rolling out the platform across the nation, we continue to receive multiple dealer enrollments every month. We look forward to continuing this journey with our partners at MINI USA, and we are very proud to be front and center, a technology fit, for the industry's shift to digital sales models. We started Otoz because we saw the beginnings of a fundamental change in consumer behavior, not only the way they purchased assets but also in the way they use assets. Consumers seek flexibility, affordability and convenience, and industry responded by offering new mobility models and alternate usage options, such as car sharing and car subscriptions. We form their vision to provide OEMs, lenders and retailers with the technology backbone and tools to sustainably launch and scale these new types of models. As further validation to that vision, I'm excited to share that we have signed a new agreement with a Tier 1 automotive company in the U.S. to provide our Otoz mobility platform, which will manage back-office operations with their vehicle subscription business. Undoubtedly, our success in MINI was a strong reference in winning this contract, and we look forward to evolving both partnerships over the coming months. Looking ahead, we are taking the next steps in our commitments to fintech innovation and building pure-play SaaS products under the umbrella of our newly formed Apex marketplace starting with our most recent launch of Flex, an API-based ready-to-use calculation engine that guarantees precise calculations at all stages of the contract life cycles through various calculation types. Flex is a one-stop solution, providing an instant cloud-based calculation engine with an out-of-the-box integration that can be implemented in organization's products, services and ecosystem. We have already seen early traction with European Merchant Bank becoming the first subscriber to Flex solution. Over the coming months, we will continue to market Flex to the global credit industry and launch more pure-play SaaS products, like Flex under our Apex marketplace. With 2 leading U.S. automotive companies trusting the Otoz platform and early traction of our first pure SaaS play product Flex, we are now well positioned to be a leading provider of disruptive, innovative and digital solutions complementing our flagship asset offering in the U.S. market and globally. With this overview completed, I will now get into our operational updates from this quarter. Starting in APAC, and with the previously announced 12-country, $110 million contract with Mercedes-Benz mobility, we are continuing to make considerable progress along our multiyear, multi-country implementation road map. I'm happy to report today that we have now successfully delivered 85% of the program. At the moment, we have ongoing implementations in Japan, Korea, Australia and Taiwan that are expected to be concluded within 2023. Finally, our second largest flagship Ascent contract with BMW Financial Services for over $30 million, a global automotive financial services company in China continues to move forward. Based on additional implementation considerations, we are currently anticipating a 2023 go-live. With the recent execution of new [ SaaS ] with different customers across the globe, I'm happy to report that our professional services vertical has started growing nicely. Demand for additional customization services from existing APAC clients continues to rise, as the quarter witnessed revenues earned in excess of $2 million from these additional services alone. Existing support revenues from our APAC clients are also expected to go up in the following year on account of renegotiations underway and additional services delivered to APAC clients. Looking ahead, our pipeline of opportunities within the APAC region continues to grow. We are encouraged by the quality of opportunities we are seeing in our largest core market and believe the ongoing recovery in this region to be emblematic of a larger return to work across our global operations. Moving next to our European operations or NTE. Europe and North America remain exciting new growth areas for NetSol. We are strategically marketing our cloud and SaaS-based offering specifically in these regions, which are contributing to their growing subscription and support revenues noted earlier. We have several opportunities with Europe. Specifically, they are making their way through the sales cycle. While we can't control when some of these deals get signed, we believe our current momentum, combined with the critical mass of potential deals bodes well for some future wins in the coming months. During this quarter, we continued to implement NFS Ascent for a major Scandinavian bank with the plan for 4 countries go-live by 2024. We anticipate considerable new work to be generated from the European market as we move through the process of these implementations. Finishing with our North American operations on NTA, we previously announced the first official sale for NFS Ascent in the U.S. market, an agreement with motorcycle group to deploy the cloud-based version of our flagship platform across their entire operations, including our omni point-of-sale and contract management system to support retail lending and leasing. Motorcycle group consisting of motor lease and motor loan, presents lease and loan offers simultaneously to qualified applicants so that motorcycle and power sports dealers can maximize their sales and enable consumers to prequalify and select their vehicle through motorcycle advisers. Project implementation began in July with an expected to go live in February 2023. Going forward, we will be looking to leverage this breakthrough agreement to prospective clients throughout the North American market. Our current pipeline of opportunities in this region remains the greatest near-term growth opportunity for our business. In summary, we had a strong start to the year. We are seeing healthy recovery in all our operating regions and are making investments today that will support sustainable growth for the future. And with that, we can open the call for questions. Operator?

[Operator Instructions] Our first question comes from the line of [ Karl Phillips with Union Street Capital. ]

So my first question is, I know that you invested in the business a bit this quarter and had some inflation pressure. But as you think about that business over the mid- to long term, how should I think about where margins could potentially go if you're able to continue to drive revenue growth? I saw -- just to be clear, I'm not looking for guidance. I just want to understand how you're thinking about this.

I think historically, gross margins have been very strong, like in 60% range and 30% to 40% for the operating margin in the past -- in the peak time, I think, 2019 or so. This business had, at least, those margins gain in the future, but on a substantial sustained basis I believe, as we grow our revenue, as we sign more contracts, this will naturally impact in a positive way both margins. And of course, as you know, we have pivoted to SaaS revenue model also in the last 2 years, that has impacted in the beginning adversely in the revenue growth. But eventually, as I said in my prepared remarks, SaaS revenues on the growth side very impressively, and we can see healthy growth in this fiscal year. So I'm pretty confident that the revenue will grow, the margin will improve, and I think it will be more sustainable in the long term.

Got it. Okay. And then your recurring revenue grew a bit faster than your consolidated revenue this quarter. And I was just wondering is this a trend that we can expect to sustain.

Well, I think look, the signs are encouraging. I mean I've talked about openly about the challenges we have faced along with the whole world in our business space, and I'm pretty confident based on our very healthy pipeline, activities are growing in every region: North America, Europe, Asia Pacific. We believe we can see an impressive sustainable revenue and a faster CAGR overall in the revenue. This is a very positive sign, I believe. We know why we're investing in people and technology and leadership, simply because we see the opportunities are growing. And it is taking time, but I think these are very encouraging signs to grow our revenue on a consistent basis.

Our next question comes from the line of [ Robert Green with Lafton Partners ].

First off, does uncertainty concerning new cars affect your business?

I'm sorry, we lost you. Hello?

Hello? Can you hear me?

Yes. Yes. Can you please start over again. Sorry, I've missed it.

No worries. So does uncertainty concerning new cars affect your business?

I think, yes and no. I believe, of course, there's the shortage supply chain worldwide. We're seeing noticeable activity in both fronts. I believe particularly North America market is quite resilient and strong. We have more opportunities in the last few months than ever before. That's a sign that the U.S. market is healthy and strong, and it is still in demand for our business, our product, our solutions. So I'm pretty encouraged with the opportunity in the U.S. So I don't see any threat, any kind of further deterioration on this side.

Got it. Got it. And then just second, it looks like North America did well this quarter. Is this a relatively new market for you? Could you expand on how North America kind of fits into your global strategy?

Actually, good question. This is not a new market for us. We have been, by design, focused on APAC because that's where we have really captured the majority share position, especially in China and on 10 or 12 other markets in the whole APAC region, we contribute heavily from that region. And U.S. was always a market which needed a lot more readiness in terms of product, team and experience in the other regions. So what we're doing is, what we have -- the successful we have in China was especially in the large Tier 1 customers. We are trying to replicate the same strategy in the U.S. market. This is a big market. This is the biggest market of all the other regions. So we're now positioning ourselves with the right team, the right strategy and new verticals as well as our core business. So I think NetSol U.S. is the place where we'll see bigger successes in the coming years. It has been around for many years. It is just that by choice but decided to focus on APAC and Europe, and now we believe for the last 2 years, very active in engaging with the new customers, current customers and bringing the right people to be able to unlock this market in a very impressive way in the coming years. So this is a really exciting time for us in the U.S., and we hope we can sign some contracts in the coming months.

[Operator Instructions] At this time, this concludes our question-and-answer session. If your question was not addressed during the Q&A session, please contact NetSol's Investor Relations team by e-mailing them at [email protected] or by calling them at (949) 574-3860. I'd like to turn the call back over to Mr. Ghauri for his closing remarks.

Thank you for joining us today. I especially want to thank our investors for their continued support, our loyal customers and our dedicated employees for their ongoing contribution. We look forward to updating you on our next call. Operator?

Thank you for joining us today for NetSol's Fiscal First Quarter 2023 Earnings Call. You may now disconnect.