NetSol Technologies, Inc. ($NTWK)

Good morning, and welcome to the NetSol Technologies Third Quarter and 9 Months Ended March 31, 2026 Earnings Conference Call. On the call today are Founder and Chief Executive Officer of NetSol Technologies, Najeeb Ghauri; Chief Financial Officer, Sardar Abubakr; and Senior Vice President, Legal and Corporate Affairs, General Counsel and Corporate Secretary, Patti McGlasson. Also available for the Q&A portion are Chief Accounting Officer, Roger Almond; and Chief Marketing Officer, Erik Wagner. I will now hand the call over to Patti, who will provide the necessary disclaimers regarding the forward-looking statements made during today's call. Patti, please go ahead.

Thank you. Good morning, everyone, and thank you for joining us today. After we review the company's business highlights and financial results for the third quarter and 9 months ended March 31, 2026, we will open the call for questions. Before we begin, I'd like to remind you that our remarks today may include forward-looking statements within the meaning of the federal securities laws, including the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements reflect management's current expectations and are subject to risks and uncertainties, and actual results may differ materially from those expressed or implied. We encourage you to review the cautionary statements and risk factors contained in NetSol's press release issued earlier today as well as in our filings with the Securities and Exchange Commission, including our most recent Form 10-K and quarterly reports on Form 10-Q. I'd also like to note that today's discussion will include certain non-GAAP financial measures. A reconciliation of these measures to their most directly comparable GAAP figures can be found in the press release issued earlier today. Lastly, please remember that this call is being recorded and will be available for replay on our website at netsoltech.com and through a link included in today's press release. [Operator Instructions] I will now hand the call over to our Founder and CEO, Najeeb Ghauri. Najeeb?

Thank you, Patti. Good morning, everyone, and thank you for joining NetSol Technologies call to review our results for the third quarter and 9 months ended March 31, 2026. The third quarter was a record quarter for NetSol. Total net revenues were $19.8 million, the highest quarterly revenue in the history of the company. Recurring subscription and support revenue grew approximately 11.7% year-over-year. Income from operations was $3 million, up from $1.6 million in the prior year period, and non-GAAP adjusted EBITDA was $3.4 million compared with $2.3 million in the prior year period. For the 9 months ended March 31, 2026, total net revenues were $53.7 million, an increase of approximately 12.5% over the period -- prior year period. This is further evidence that the strategy we have been executing, unifying our products under the Transcend platform, deepening our customer relationships and embedding AI throughout our origination workflows is delivering. I would like to walk through 3 areas that define the quarter. First, I'd like to talk about customer momentum, followed by the continued ramp of Transcend Retail, and then I'll discuss our progress on artificial intelligence. First, on customer momentum. As we discussed on our last quarter's call, in December, we executed a $50 million 4-year contract extension with one of the longest tenured Mercedes-Benz, a Tier 1 global auto captive customer, a relationship that we cherished since 1997. During the third quarter, we recognized the onetime license investment associated with that renewal, which contributed approximately $4.7 million in license revenue. This extension reinforces the recurring nature of our most important customer relationships and provides multiyear revenue visibility into our subscription, support and services pipeline. The renewal also brought a significant annual maintenance billing event in January, which our CFO, Abubakr, will discuss in more detail in the financial review as it is the principal driver of the working capital movements you will notice in the balance sheet this quarter. We also achieved meaningful customer milestones across our Transcend finance footprint during the quarter. In late January, we went live with Northridge Finance, a division of Bank of Ireland, U.K. On Transcend Finance in March, a Tier 1 global auto captive that is Ford China went live on Transcend Finance in China. Both go-live reflect Transcend Finance ability to scale across geographies and product lines and both convert into recurring subscription, support and services revenue going forward. Additionally, we renewed a multimillion dollar agreement with a long-standing partner, Investec Bank, for the continued use of our finance and leasing platform. They are a premium Tier 1 multinational bank in the United Kingdom with whom we have had a relationship for over 15 years. Second, on Transcend Retail. In the U.S., we have continued to see strong demand for our digital retail solution for BMW dealerships and OEMs, and it is becoming a meaningful contributor to our recurring revenue. We have opportunity to go live in all U.S.-based BMW dealership or almost 350 locations in 2-year time frame. Pipeline activity is robust, and we continue to close new dealerships across -- group across customers in the U.S. We have continued to expand the presence in the U.S. dealer market through the third quarter. The combination of fast time to go-live, modern user experience and integration into the broader Transcend platform is resonating with the dealer groups, and we believe this is a market segment with substantial runway over the next several years. In U.S.A., subscription and support continue to perform well with double-digit recurring revenue growth supported by go-lives and contract expansion across our customer base. Services revenue moderated this quarter compared with the prior year period, which had benefited from a onetime pickup associated with a customer contract amendment and from elevated implementation activity that has since transitioned into recurring revenue. Underlying services and products demand remains healthy across the globe, and our pipeline of implementation work supports continued progress through the remainder of fiscal 2026 and into fiscal 2027. I'd like to now discuss the progress in artificial intelligence or AI that continues to be essential to how we differentiate. Our approach is to generally embed AI directly into the workflows our customers run into the Transcend platform rather than build stand-alone AI features. The clearest example of this is our AI-enabled credit decisioning engine within Transcend Finance, which we introduced earlier this fiscal year. It operates as an architecture layer that sits inside our lease and loan origination solution and uses deep reasoning and agenting workflows to accelerate the pace of credit decisions with consistency and human oversight built in. Customers running originations on Transcend Finance can activate our credit decisioning engine to compress decision, turnaround time and improve underwriting throughput. This is the model we will generally continue to follow as we extend AI across the platform, deeper integration into existing customer workflows tied to measurable outcomes. We also introduced our AI native intelligent document processing solution for asset and financial commercial finance. It combines optical character recognition, for short OCR, with large language model capabilities to extract and structure information from financial documents, enabling faster credit and compliance workflows while reducing manual effort and improving operational efficiency. Looking ahead, we are partnering with our clients on the next wave of AI initiatives, embedding intelligence deeper into the decisions and interactions that drive long-term value for our customers and their consumers. I'd now like to turn the call over to our very dynamic new CFO, Sardar Abubakr to review the financial results in detail.

Thank you so much, Najeeb, and good morning, everyone. I will begin with our financial results for the third quarter of fiscal year 2026, followed by results for the 9 months ended March 31, 2026. For the third quarter of fiscal 2026, total net revenues were $19.8 million, a record for the company, compared with $17.5 million in the prior year period, an increase of approximately 13%. The increase was driven primarily by higher license fees associated with the renewal of our $50 million 4-year Tier 1 auto captive contract, together with continued growth in recurring subscription and support revenues. Overall, we continue to build on the double-digit growth momentum from Q2. On a constant currency basis, total net revenues were $19.6 million. Subscription and support revenues increased approximately 11.7% to $8.8 million compared with $7.9 million in the prior year period. On a constant currency basis, subscription and support revenues were $8.8 million. License fees for the third quarter were $4.7 million compared with just over $1,000 in the prior year period. Services revenues were $6.3 million compared with $9.7 million in the prior year period. The decrease primarily reflects the timing and composition of current implementation projects as well as a onetime pickup of approximately $2.4 million in the prior year period. On a constant currency basis, services revenues were $6.1 million. Gross profit for the third quarter was $11 million or 55.6% of net revenues compared with $8.7 million or 49.8% of net revenues in the prior year period. On a constant currency basis, gross profit was $10.9 million or 55.5% of net revenues. During the quarter, we also recorded a onetime impact related to Pakistan super tax regime. This relates to a retrospective adjudication of the tax for prior periods following recent court developments. As a result, we recognized a charge of approximately $0.4 million, which impacted net income in the period. This is a onetime nonoperational item relevant to multiple sectors and not NetSol alone and does not reflect our underlying core operating trends. Non-GAAP EBITDA was $3.4 million in the quarter, an increase of approximately 47.8% compared with $2.3 million in the prior year period. Non-GAAP EBITDA margin expanded to 17.2% compared with 13.1% in the prior year period. Foreign currency movements resulted in a loss of approximately $0.1 million in the quarter compared with a gain of $0.3 million in the prior year period. GAAP net income attributable to NetSol was $1.3 million or $0.11 per diluted share compared with $1.4 million or $0.12 per diluted share in the prior year period. Now coming to our results for the 9 months ended March 31, 2026. Total net revenues for the 9 months ended March 31, 2026, were $53.7 million compared with $47.7 million in the prior year period, an increase of 12.5%. On a constant currency basis, total net revenues were $52.9 million. Recurring subscription and support revenues for the 9 months were $26.9 million, an increase of 8.6% compared with $24.7 million in the prior year period. On a constant currency basis, recurring subscription and support revenues were $26.5 million. License fees for the 9 months were $4.9 million compared with $75,000 in the prior year period, reflecting the renewal recognition I described earlier. Services revenues for the 9 months were $21.9 million compared with $22.9 million in the prior year period. Annualized recurring revenue is forecasted to be approximately $35 million exiting the third quarter compared with approximately $32.9 million in the prior year period, an increase of 7%. Gross profit for the 9 months was $26 million or 48.4% of net revenues compared with $22.2 million or 46.6% of net revenues in the prior year period. On a constant currency basis, gross profit was $25.3 million or 47.9% of net revenues. Non-GAAP EBITDA was $3.5 million, an increase of approximately 84.2% compared with $1.9 million in the prior year period. Non-GAAP EBITDA margin expanded to 6.6% compared with 4% in the prior year period. Turning to the balance sheet. Cash and cash equivalents were $14.7 million at March 31, 2026, compared with $17.4 million at June 30, 2025. The decrease in cash flow from operations during the period was primarily attributable to changes in working capital, including the timing of customer billings and collections associated with certain large customer arrangements. Accounts receivable increased during the period due to the timing of collections on invoices issued under these arrangements. These receivable balances have since converted to cash in the normal course of business. Overall, the third quarter reflects a continuation of our focus on double-digit top line growth year-over-year, underlined by consistent improvement in margins and EBITDA, a healthy balance sheet and strong cash flow situation. I will now hand the call back to Najeeb.

Thank you, Abubakr. Looking ahead, we are reaffirming our full year fiscal 2026 revenue guidance of approximately $73 million to $74 million. We are pleased with our 9-month performance and the underlying momentum we are seeing across the Transcend platform. Our core products, Transcend Finance remains strong, while our loyal and long-term partners could not be more pleased with their ROI on the full solutions. Our focus heading into the fourth quarter and into fiscal 2026 is unchanged, extend the depth of our largest customer responsibilities, relationships continue to expand the unified Transcend platform with embedded AI capabilities like AI-driven credit decisioning engine and accelerate growth of Transcend Retail in the U.S. dealer market. While macroeconomic and currency dynamics remain a consideration, our diversified business model, our long-term customer relationships and the underlying strength of our recurring revenue base provides a solid foundation for the remainder of fiscal 2026 and beyond. With that, operator, please open the line for questions.

[Operator Instructions] Our first question comes from the line of Todd Felte with StoneX.

Congratulations to you and your team on a great quarter. It was really nice to see the revenue and margin improvement. My first question just deals with, is this type of revenue and margin growth can be continued? Or is this mainly the result of the onetime license fee that you collected in the quarter?

Thank you, Todd, for this question. I appreciate your long-term relationship. I think we see a long-term vision. We believe this pattern will continue. And I think because the pipeline is strong, very healthy and getting a lot of interest from our new customers and, of course, the existing customers.

Okay. And also I wanted to follow up. It looked like your Pakistani subsidiary had a really strong quarter. And I know -- I think you own 69% or 70% of them, and you will always take a noncontrolling interest loss based on that percentage you own. Has there been any further discussions about fully acquiring them? I know your earnings would have probably been around $0.20 a share if you had had full control of them.

Absolutely, very right observation, and I think we talked about it before a couple of times, Todd. We have this initiative in our mind as a top priority. We just need to manage our financing so we can completely buy out the remaining 30%. Of course, it would make NetSol parent company much stronger in the both top line and bottom line. But this is the one key initiative we're still working on.

[Operator Instructions] Our next question comes from the line of Michael Kupinski with NOBLE Capital Markets.

And I'm a little new to the story, but I have a couple of questions here. I was just wondering in terms of, obviously, a lot of geopolitical events going on, how exposed is the business to the China auto finance weakness and our broader global auto sales trends? I was just wondering if you can just give us some color there.

Well, thank you for this question. I think it is obviously a macro level. There's all kinds of things happening in this new world order. We're not that exposed. I think we have a pretty solid customer base. They're highly dependent on this products and services. We have an excellent team in Beijing and Tianjin. Our customers are supported by the people over there and the back office in Lahore, Pakistan. So I think we're not concerned. Of course, we watch, follow conditions very closely. But I think our product is amazing. Our technology is amazing. Our people are amazing and the customers are dependent not just to China, but all across 3 global regions. So I feel comfortable about the situation. Of course, I wish that things were a bit better. In terms of Pakistan, it's one of the safest country to do business with. People are traveling comfortably. Our people are enjoying. Our customers are visiting us back and forth. So I think overall, we're in a pretty good condition.

And are there verticals outside of automotive that could materially move the needle for you over the next several years?

I think so. I believe so.

Can you identify what those might be?

Well, I think we are looking into pretty impressive, quite frankly, double-digit organic growth in the coming years. We have some other ideas, which obviously I can share right now in a positive way, how we can further really expand our footprint in the U.S. market, particularly. Of course, we've done very well accretive revenue. We're also open to looking into M&A opportunities eventually, given the right opportunities to really grow the U.S. business especially. So I think there's lots happening in the macro level, in the micro level. The company is very vigilant, alert on the opportunities in front of us. Of course, so many years of this experience in this company in all 3 regions, we have enough, I think, understanding of different environment and how to manage the situation. So our team has really fired up every location and really doing well for the company and the shareholders.

We have no further questions at this time. Mr. Ghauri, I'd like to turn the floor back over to you for closing comments.

Thank you very much. My friend, my dear shareholders, we remain focused on executing against our strategic priorities and building on the momentum across our business. And we look forward to updating you on our continued progress as we close out fiscal 2026. I want to personally thank all of our shareholders, our global clients in the U.S., Canada, Europe, China, Australia, Thailand, Indonesia and Pakistan and all of our most dedicated NetSolians worldwide. As a reminder, we will hold our AGM Shareholders' Meeting on June 18, 2026, at our Encino headquarters, where shareholders will be entitled to participate and vote on the resolution presented either in person or by proxy. We encourage all shareholders to vote upon receipt of their proxy materials with the Board's recommendation. Thank you for joining us today and for your continued interest in NetSol. Have a good day.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.

Thank you, Christina. Have a good day, too.

You too as well.