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

Good day, and welcome to the IAccess Alpha - Buyside Best Ideas Winter Conference 2024. The next presenting company is NetSol Technologies, Inc. [Operator Instructions] I'd now like to turn the floor over to today's host, Faizaan Ghauri, Chief Strategies Officer at NetSol Technologies. Sir, the floor is yours.

Thank you, Ali, and great to be here with you all. I'm happy to present today NetSol Technologies, and I'm also joined by our Chief Financial Officer, Roger Almond; and our Chief Marketing Officer, Erik Wagner. So just moving through the slides here. Of course, our safe harbor statement. So you've seen many of these, and so I'll continue on. So NetSol Technologies has been in business for over 25 years, founded initially in 1996 and IPO-ed on the NASDAQ in 1998. And really, at our core, we are a technology company delivering to the asset retail, finance, leasing, automotive and equipment space. So we work with some of the biggest financial institutions, biggest auto captives in the world, the likes of Mercedes-Benz, BMW, Toyota, Nissan and the list goes on. So if you look at our space, we are very much focused on the global leasing market, which as of 2023 was projected at about a $1.5 trillion global market. Now over the last decade, we've seen about 70% growth, and there is an expectation that by 2032, with about a 10% CAGR that, that market is going to grow to about $3.1 trillion. So NetSol as a company has been in the space, worked with many auto captive and equipment financial institutions. And really, we are the best-in-class for multiple reasons. So number one is that we've established a leadership position in APAC and Europe. So in China, for instance, which is one of our biggest markets, we have over a 75% market share on the auto captive leasing space. So most of the OEMs and captives in the country actually work with us. Similarly, in Europe, we have a number of large positions as well, and I'll talk more about the U.S. shortly. But what's exciting about our business is really that it has transitioned over to much more of a recurring revenue business. And because when they implement our Transcend platform, which I'll talk about a little bit more later, it's actually a generational implementation, meaning that there's high lock-in and there's very little customer churn. So if you look at our overall customer churn, it's less than 5% over that period. Thirdly, we have expanded our product segments. So historically, we're focused on the finance side, but now we have really entered into the digital retail market, and I'll share some updates there as well. As I mentioned earlier, we have really started transitioning our revenue base. Nearly half, maybe more than half now of our revenue is coming through SaaS and recurring revenue, which is also increasing our deal flow and velocity. We have a clean balance sheet, $20-plus million of cash on balance to help execute our growth strategy. We really turned the corner on profitability. We delivered a profitable year last year, and we are on track to do so this year as well. This year, we are continuing the trend of last year and projecting double-digit revenue growth. Really focused on our investments in AI and cloud technology, which I'll talk about in more detail. And there is a massive valuation discount on the stock today. Currently, we are trading at nearly about 1x book value and 1x recurring revenue. So there's -- both if you're looking at it from a growth perspective or from a value perspective, there is a lot of upside in our stock. So moving on, I'm going to talk about really the technology that backs this great business, which is the Transcend platform. So Transcend is really an AI-driven unified ecosystem that revolutionizes how assets are sold, financed and leased. So really, we are automating every step of the automotive or equipment sales process from the actual sale to the origination of the loan to servicing of that lease as well. So Transcend is using AI and ML across the stack to drive predictive insights and smarter decision-making. And I'll show some examples further. But we've had a 100% success rate with our implementations around the world. If we commit to a customer, we make sure that we deliver on time, on schedule, no matter what it takes to do so. And we have about -- close to about 200 customers worldwide that are using different components of the Transcend platform. So I just want to break down the different pieces of Transcend. So of course, there is our Transcend Retail solution. So Transcend Retail is focused on effectively digitizing the process of buying complex assets. So in our case, we tend to work with a lot of automotives. And so we won a few years ago, we won Mini Cooper's business, which is a sister organization of BMW, and we actually delivered our end-to-end e-commerce solution for Mini Cooper dealers. And the result of it is that they see 5x more leads that come in now that they've digitized the process. And what I'll share a little bit more is over the summer, we won a big ticket OEM and manufacturing that was about a $16 million deal on the backs of winning Mini, which we'll share a little bit more detail as we move on. So then the next really sort of like core component of the platform is Transcend Finance. So really, this is where we sort of beach-headed our product base, and it's been a product that's been evolving over the last few decades. But essentially, it streamlines the finance and leasing operations. It's really the lifeblood of an auto captive or equipment by managing the origination servicing and wholesale finance. Now these 2 products are sort of more enterprise in nature. But what we identified is that the world was really moving more towards APIs, towards micro services, towards what you would see in fintech companies like Stripe. And so a few years ago, we actually started the process of really moving our technology set down market by launching the Transcend Marketplace. So the marketplace, what we've done there is whereas Transcend Finance has thousands of different capabilities and components, we've actually unbundled those components and actually built them as services that anyone can go to the Transcend marketplace website. They can learn about these components. They can download these components, they can read the documentation and they can start paying a SaaS fee and really working in a self-service manner to actually go build out to use our capabilities. Then we have Transcend Consultancy. So we've been doing -- our consultancy is effectively our professional services. That's actually how we got started as a business. I mean we started by winning a professional services contract with Mercedes-Benz 20-plus years ago, and that eventually evolved into product-based selling with our Transcend Finance product. But consultancy is quite important to us, and we continue that capability. And then finally, and excitingly, we've announced just recently our Transcend AI Labs. So this is really our full capability around bringing in AI. All of our customers are asking about it. They're all wanting to understand how they can actually go and bring AI into their businesses. And so really, this AI labs is there to support every customer bringing on and automating different parts of their business through AI as well as bringing AI into our product stack. So everyone is talking about AI. I wanted to give some concrete examples so you can see it in action. So here, I'm going to share with you on the dealer side, how essentially we are using chatbots now, all driven by large language models to basically automate and support the whole dealership experience. So instead of spending hours going into a dealer and spending your day almost to get a vehicle, you can actually initiate that whole experience through a digital dealer chatbot. So I'm just running an example here that's an implementation with one of our customers for the Transcend Retail, but you can go to the chat window here. You can put what your requirements are. In this case, this customer is looking for an electric vehicle with cutting-edge technology. You're going to see a number of different options show up for you. You're going to get the relevant details about the cost. And then you can go ahead and start customizing your vehicle. And again, this is all running through an LLM trained on the customer-specific data. You can continue customizing it, picking what kind of sunroof you want or speakers, and these are all different sort of cards that show up. And of course, because we, at NetSol, we offer a unified platform that's not just the retail side, but the finance side, the whole financing process actually runs through our system, which is mostly where a lot of complexity lies with buying assets. So you can see your financing options here. And then finally, you're going to receive -- you're going to be able to proceed to your financing, run a quick credit check and basically do all that process that usually get your credit score, which would have taken you a long time at the dealership, you're just able to basically do through AI and have a full-on conversation. So this really shows the power of how AI is actually transforming our business. Customers are expecting to get answers on the fly. And because we offer this full suite of capabilities in our platform, we're able to service that. And really, through these capabilities and through our focus, we've been able to focus pretty significantly on North America, and we're starting to see some very exciting trends in North America. So we've got a strong pipeline developing North America. As I mentioned, really our Transcend retail product allowed us over the summer to win a $16 million contract with a Tier 1 North American major automaker, which is going to allow us basically in delivering that. It will be the best-in-class, probably most sophisticated digital retail experience in the market. And really our test that started with MINI U.S. that scaled to about 55 dealerships, this $16 million contract is going to scale to about 100-plus dealerships around the country. And just take a note from one of our customers here, Mike Peyton, who is the Vice President of MINI Americas. He was impressed by we were able to actually launch the MINI capability 7 months after development, which he stated is almost unheard of for this type of project. And why we're able to deliver so quickly was because we understood that full stacking capability. So if I move on, just to give you some more insight on our revenue base. So we started very much focused on sort of the traditional license and maintenance fees, and that's been the historic driver of business. But over the last few years, we've really transitioned towards SaaS and hybrid SaaS. So sometimes there is an implementation component, but there tends to be now a SaaS and subscription fee that customers pay to use our product. Those tend to be pretty customized in terms of what that subscription fee looks like, but it does allow us to have predictable revenue. And then, of course, services revenue. So there's a lot of upgrades and updates and consulting capabilities because we understand the customers' business so well, they actually have us involved in a number of different areas. And because of our success in technology, they actually have us involved in a lot of other technology areas. So example is in China, where, as I mentioned, we have a 75% market share. Because of how successfully we delivered on the finance side, we've actually helped our customers with building various applications, both mobile applications, web-based applications to generally leverage our technology set within the customer base. So moving on to talk just about the breakup of revenue, if you look at it from different segments. So as we mentioned, this is our revenue looking at the first quarter of this fiscal year. And essentially, what you're seeing is that, of course, APAC tends to be about 63% of our revenues. Europe is about 17% and North America is about 20%. So we have offices around the world in APAC. We've got offices in Beijing, Bangkok, Jakarta and Tianjin, China, in Europe. Most of our offices are in the U.K. But again, we're working with major automotives there. We're really working with the banking infrastructure there. And then in the U.S., where we see massive growth potential, Essentially, we got in the U.S. by acquiring a business about 15 years ago. And really through that, that customer base has stayed with us or they've also migrated on to our next-generation product set there. And our office -- our headquarters is in Los Angeles, California, and our main sales and delivery center is based out of Austin, Texas. And we invite any potential prospective investors, they can come visit us and spend some time with us there. We'd love to have you there. So moving on, just a little bit more on the financials, is really, we have turned the corner when it's come to revenue and profitability. So we hit our guidance last fiscal year. So we did about -- we projected about $60 million to $61 million in guidance, and we did about $61.4 million in revenue. Our gross margins are up as well. So really, you've seen fiscal year '24 gross margins at 48%. That's up from 32% in '23. And so our profitability was about $0.06 per share. And what I'll mention here is that part of our gross margin expansion is really as the product set has matured, it's actually become less resource-intensive to actually to deliver our products. So over the course of the pandemic, we let go about probably about 300 or so technical resources and yet the business still continued. The revenue actually grew in that period because the product has matured so much. So we are tracking over the last few years at about 12.3% CAGR. And really, if you look at the sources of future revenue growth, we expect to see -- we've really expanded and invested in our digital marketing capabilities. So that team is led by Erik, and he'll talk more about it if there are some questions that arise around it. But really there, we have a pretty sophisticated digital marketing capability that's allowing us to assess demand and understand customer needs across the globe and really expand and share and evangelize a lot of the great capabilities we've built out. We are beginning to monetize our investments in AI. And so our Transcend AI Labs has -- I showed you one example of some of the technology that's coming out of there, but there's multiple different use cases that we're building for it, that are both helping us internally optimize our capabilities and be a lot more efficient, but then also offer these capabilities to our customer set. And then thirdly, our future revenue growth is really -- we've expanded our product set and our market pretty significantly. So being historically in the finance space, you were working with mostly the banking sector. But now that we are in the digital retail space, which is really the auto tech space, if you look at some of the players that we won that $16 million contract with against, I mean, the competitors, there were 16 competitors that we all beat. Some of them are private companies that are valued in the billions of dollars and still that Tier 1 automotive company worked with us because of the sophistication of our capabilities. So I just want to summarize, and then we'll go ahead and move to questions. But as I mentioned, cash on hand has grown significantly. So we're about $24 million cash in the bank. Working capital is high also at $24 million. And just finally, to summarize, we expect the sales to continue growing with the introduction of the Transcend platform. into multiple markets. We expect to continue establishing a leadership position. And because now our Transcend marketplace allows us to go for the Tier 2s, the Tier 3s and Tier 4s, we're able to really expand the customer segment we can go after. We're continuing to invest in innovation, particularly on AI. We are -- we have a mission to be an AI-first company. So you're seeing AI come into a number of different streams. And we continue to expect to create double-digit revenue growth. And then finally, as I mentioned, we are trading at 1x book value and 1x recurring revenue. So we think the stock is at a massive discount. If you -- even without looking at the growth potential, if you just look at where the stock is at in terms of these metrics, there's a lot more value that should be there. So with that, I'm going to -- I know we've got about 9 minutes left for questions. So happy to take questions. And I will also bring some questions on -- I'll have some questions answered by Roger and Erik as well.

All right. Okay. So the first question I see here is, is there anything else you can share about your AI initiatives and how you're integrating this into your products for your customers as well as into your business operations? So I'm happy to take that. So Transcend AI Labs is now a capability that has about 20 different technical resources working on it. Now the great news for us is our development center is based on Lahore, Pakistan. And NetSol is considered literally the Google of Pakistan. So we get the best and brightest talent out of a talent pool of nearly 300 million people, 70% under the age of 30. So you have the best and brightest who want to work on AI that are working with us. And because of the cost arbitrage, I always say like an AI team like the one we have in Lahore, they cost about -- in the U.S., it costs about $20 million to build up. In Pakistan, the equivalent would be about $2 million. So there's just a massive cost arbitrage and innovation premium that you get there. So that's allowed us to scale up our team. We're also quite excited that early next year, we will be announcing an AI head who is a global leader in the space and really there to support our customers to evangelize what we're doing on the AI side. And we'll also be announcing a global AI CTO. So those announcements will be coming very -- coming in early next year. But just generally, I mean, AI is coming into a lot of different areas for us. So I'll give you one internal example. We have -- our business is very much dependent on massive RFPs that come in. They're very detailed. And historically, they have taken us weeks on end to be able to actually answer these RFPs. But now we've actually built an AI capability that allows us literally when an RFP comes in, within a few seconds, there's at least a first graft that's created by our knowledge base of our previous data on AI, on customer data to be able to actually answer those questions very effectively. So then there's also in our technology, there's things like intelligent document processing that we're building out right now, which essentially, if you look at a lot of the Transcend Finance platform, a lot of it is data entry. So we've actually leveraged AI to be able to even take a lot of credit application data. It's kind of old school. It even comes in through fax machines. So we're actually able to use this intelligent document processing system to grab information and semantics out of a document and be able to add it to the platform. And so what that does is it literally saves you 99% of the time you would spend on data entry. So lots of other initiatives. But I'll move on to the next question here, which is the opportunity in the U.S. is compelling. Can you provide more color around your near-term strategy to expand into this market? Erik, do you want to take that?

Sure. I can touch on that. So I think there's a few different things that come to mind. The first is we work with nearly every single Tier 1, Tier 2 automotive OEM in the market, but we may not work with them within North America. And so part of our goal is to start to upsell and cross-sell to our existing customers who operate globally, but we may not do business with them today in North America. And so that's kind of a starting point as to where we want to focus. And then in addition to that, we want to look outside of our existing customer base and start to find opportunities for some of our newer products that we're offering in the market. For instance, our digital retail platform, Transcend Retail. We mentioned, obviously, Transcend Consultancy, our consulting services there. We want to build our brand awareness and brand recognition within those spaces, which are a little bit newer for us in -- particularly in North America and see how we can kind of continue to grow and build momentum that way.

And I'm going to combine this -- so I've got 2 questions here, but I want to make sure they get answered and I think they speak to the same thing. So I'm going to combine them. And I'm going to pose it to you, Roger. So the question is, you have mentioned double-digit revenue growth in 2025. Do you have any expectations on what the subscription and support side of the business will be as a percentage of revenue next year? And then it says it was roughly half of your revenue in 2024, I believe. Is it growing as a percentage? And then second question is what are the margin characteristics of this business relative to overall gross margins?

Yes, good question there. So we expect the subscription and support to continue to increase in the double-digit figure. As you mentioned, is probably around 50% this last year, and it will continue to grow as we -- especially with our customer that we picked up here in the U.S., there will be some significant implementation fees with that customer, but then they will also start picking up some nice recurring revenue, which is in our subscription and support. So as we go through our hybrid model that Faizaan mentioned, is there are some companies still in the APAC area that like the on-prem model, which would be the license and then the maintenance on top of that. But here in the U.S. and in the U.K., they're going more to the subscription model. So as we continue to bring on more of those type of clients or customers, which may be your Tier 2, Tier 3, then we're going to continue to see our subscription and support revenue increase to where it will probably be larger than 50% of our revenues. And gross margins will continue as we get the subscription and support revenues in, those will increase. What happens sometimes is we get the license fees. And when we get a license fee, we'll get a huge significant increase, I guess, in revenues, but there wouldn't be much cost associated with that. So you'd see a nice bump up in our gross margins. But if we don't have a license revenue, then you'd probably see us get slightly better than where we are now, especially as we start, as I think Faizaan mentioned, we're not so resource-intensive as we used to be with our older product. So hopefully, that answered that question for you.

Great. So I see lots of questions have come in. And I know we only have a minute left. So I presume that we can -- through our IR team, we can make sure these questions get answered to the prospective folks that have asked. So -- but I'll see if I can fit anything in. Maybe, Roger, if you can just answer this one. Please address your mix shift expectations and talk about 3Q results? Will the services businesses continue to decline across all geographies?

I'm sorry, about the services revenue, I didn't quite catch the question. Can you read that again?

Please address your mix shift expectations and talk about 3Q results. Will the services business continue to decline across all geographies?

No, we don't expect the services revenues to decline as we begin implementation on our customer here in the U.S. and as we continue to implement our other wins, and we expect our services revenues to increase. It's one of those items as we get new clients and we have their implementation fees or change requests, those revenues will go up. And then as those customers become fully integrated into our project, then the subscription support revenue kicks in and that increases and then maybe those services decrease. But then we always have change requests and ongoing implementation. So we don't anticipate that -- those services revenues to fall off.

Thank you, Roger. Thank you, Erik. And I think we are over time now. So as I mentioned, we'll make sure any of your questions that were unanswered, we'll make sure to get them answered. Thank you so much for your time.

Thank you.

Thanks, ladies and gentlemen. This does conclude the NetSol Technologies, Inc. presentation. You may now disconnect, and please consult the conference agenda for the next presenting company.