NetSol Technologies, Inc. (NTWK) Q2 2019 Earnings Report, Transcript and Summary

Good morning, welcome to the NetSol Technologies Fiscal Second Quarter 2019 Earnings Conference Call. On the call today are Najeeb Ghauri, Chairman and Chief Executive Officer; Roger Almond, Chief Financial Officer; Jeff Bilbrey, President, North America; and Tom Colton. I would now like to turn the call over to Tom Colton, 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. Please note, that all of 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 on our website 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, Tom, and good morning, everyone. I'm so delighted to be calling today once again from our NetSol Technologies campus in Lahore, Pakistan. This campus is our center of excellence, where we provide software development and implementation to support our clients worldwide. This is our engine for product delivery and future growth. For the benefit of those who are newer to the NetSol story, a large portion of our team operates out of Pakistan which we are very proud of and feel as a unique asset to our organization. According to the Pakistan buildup statistics, the country of Pakistan is the fifth most populous and just shy of 210 million people, the majority of which is under the age of 30. The country has an exceedingly fast growing technology industry with a high quality talent pool which has benefited our customers for over 20 years. This talent pool of software engineers is second to none. Now towards the growth. The second quarter represented yet another strong consistent performance for NetSol. We followed up our intelligent start to the fiscal year with improved financial performance, both sequentially, and year-over-year. On the surface, we grew revenues 18% in Q2 and also recorded our fifth consecutive quarter of profitability. Both of these outcomes are definitely encouraging but I cannot say they are surprising. We've been doing exactly what we said we were going to do and our model has shown that our process is repeatable. As we have made known in our previous calls, given the inherent leverage in our operating model, as well as our optimized organizational structure in place, we are able to generate significant positive downstream effect as it relates to our finances. Put another way with any increases to our revenues, there is an almost direct translation to the rest of our P&L. With this quarter's top line increase, our gross profit, as well as our margin profile have steadily improved almost in large step [ph]. At the same time, our expenses remain relatively constant. Expressed in dollar terms, our net income from operations was $2.2 million for the second quarter, an increase of $1.9 million from a net income operations of $370,000 in Q2 last year. We feel this growth is strong evident supporting our plan, that said, we are always looking for ways to improve these processes and make them more cost efficient. But it's nice to see the progress we have made thus far. Looking at the operations side of things; our successes were produced by the same formulae that's been working for us for a few quarters now. And we feel confident in our ability to continue executing against this plan for the remainder of the fiscal year 2019. First, we'll continue to convert what we have identified as the more immediate albeit smaller opportunities in our pipeline into new business throughout our major operating regions. Second, we are bringing in additional licensees from our ongoing implementation for the larger, less regular contracts. Beyond implementation, this contract will also transcend into meaningful services and maintenance revenue in the months and years to come; put together, this healthy combination has been a recipe for success. Now, before I get any further into our specific updates for the quarter I'm going to turn the call over to our CFO, Roger Almond, who will walk us through the financial results. Roger?

Thanks, Najeeb. Turning to our fiscal second quarter 2019 financial results ended December 31, our total net revenues for the second quarter were $17 million compared to $14.4 million in the prior year period. The increase in total net revenues was primarily due to an increase in total licensees at $4.4 million which is offset by a decrease in total services revenue of $1.8 million. Total license fees in Q2 were $4.8 million compared to $453,000 in the prior year period. The increase in total license fees is primarily due to license revenues recognized in the 5-year contract that was signed with BMW to implement our NFS Ascent platform in China, as well as the license revenue recognized from the contract signed with a major American multinational automaker to implement our Ascent Retail platform in China. Total maintenance fees in Q2 were consistent at $3.7 million compared to $3.7 million in the prior year period. We anticipate maintenance needs to gradually increase as we implement both, our NFS legacy product and NFS Ascent. Total services revenues for the quarter were $8.5 million compared to $10.3 million in the prior year period. On a constant currency basis, services revenue actually increased due to the new NFS Ascent implementation I just mentioned. Services revenues 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 $8.1 million for the second quarter compared to $7.8 million in the second quarter of fiscal 2018. Increasing costs of revenue for the quarter was predominantly driven by increases in travel and other expenses which are offset by decreases in salaries and consulting costs, as well as decreases in depreciation and amortization cost. Gross profit for the second quarter of fiscal 2019 was $8.9 million or 52.1% of net revenues, which was up from $6.7 million or 46.3% of net revenue in the second quarter of fiscal 2018. The increase in gross profit as a percentage of net revenues was primarily due to an increase in total revenues of $2.6 million which was offset by an increase in costs revenues of $386,000. Operating expenses for the second quarter increased 5% to $6.7 million or 39.2% of net revenues from $6.7 million or 44.1% of net revenues in the same period last year. Increase in operating expenses was primarily due to increases in salaries and wages, research and development, and professional services which are offset by decreases in selling and marketing expenses, depreciation, and other general and administrative expenses. Moving forward, we plan on continuing to judiciously allocate additional resources to our R&D budget as we focus increasingly on our innovation related initiative. Other income for the second quarter included $2.5 million of currency exchange gains compared to $1.7 million of foreign currency exchange gain in the prior year quarter. During both periods, the currency exchange gain was due to the decrease of the Pakistani rupee compared to the U.S. dollar and the euro. Turning to our profitability metrics; our net income from operations was $2.2 million for the second quarter, an increase of $1.9 million, I mean, net income from operations of $317,000 in Q2 last year. Our GAAP net income attributable to NetSol for the second quarter of fiscal 2019 totaled $2.9 million or $0.25 per diluted share; this compares with GAAP net income of $634,000 or $0.06 per diluted share in the second quarter of last year. Increasing GAAP net income attributable to NetSol was primarily due to the increase in total revenues of $2.6 million discussed a moment ago, as well as the $2.5 million gain on foreign currency exchange transaction just mentioned. Moving to our non-GAAP metrics; non-GAAP adjusted EBITDA for the second quarter of fiscal 2019 totaled $4.1 million or $0.35 per diluted share compared with non-GAAP adjusted EBITDA of $2.1 million or $0.19 per diluted share in the second quarter last year. As we have previously disclosed in our earnings releases, our calculation of adjusted EBITDA excludes the portion of adjusted EBITDA that is attributable to the non-growing interest in our subsidiary. We believe this supplemental disclosure provides additional insights into the true operational performance of our business. We see the reconciliation schedules contained in our earnings release for our revised calculations of adjusted EBITDA for the fiscal second quarter ended December 31, 2018. Turning to our balance sheet; at quarter end, we had cash and cash equivalents of approximately $20.3 million or approximately $1.75 per diluted common share which is up from $10 million or approximately $0.90 per diluted common share at December 31, 2017. That concludes our prepared remarks. I'll now turn the call back over to Najeeb.

Thank you, Roger. As I mentioned in my opening remarks, Q2 was more of the same for NetSol which in our case was a very good thing. We are continuing to reap the benefits from a variety of contributing factors all of which have us in a great spot as we head into the second half of our fiscal year. One of the good things about executing and doing what you say you're going to do is that you don't have to explain yourself too much. In light of that maxim [ph], my comments for today will be a little more brief which will leave us a bit extra time for the Q&A session. I'll start with a few updates related to some of the major implementations we have going on as well, the highlights of our new business we were able to generate during the quarter. First, beginning with our ongoing multi-year international deployment associated with the previously announced 12 countries other than $10 million contracts with a major German multi-national auto manufacturer, we have successfully commenced on the implementation process of our NFS Ascent wholesale module in Japan. Since the kick-off for the project in January 2016, NetSol Ascent wholesale module has now gone live in Australia, New Zealand, Thailand, Korea and South Africa. The next go-live of full end-to-end is scheduled for China in spring of this year which will be followed by Japan due after. Given the overall size and scale of implementation going live in China, specifically will be our biggest achievement on this project to date and a watershed event for our company when it happens. Beyond China and Japan, the next countries that we go live are Malaysia, Singapore, Hong Kong, and Thailand. Our core teams have done an amazing job managing so many key markets to implement Ascent in parallel which also demonstrates the large scale stability of our next-gen Ascent. Next, moving to one of the major we announced in Q1, we are continuing to make significant strides in the ongoing implementation process with BMW in China for the deployment of our NFS Ascent Retail and Wholesale platforms. We expect to provide updates on our progress in the coming quarters. Regarding the other major deal we announced last quarter which was with the captive auto leasing company of a major U.S. based automotive manufacturer with a strong position in China. I'm happy to say that we have officially commenced the implementation of the Ascent video platform for this Fortune500 company. In Europe, we successfully signed a new contract with a notable UK auto finance company; this deal carries a total contract value in the mid-six figures which we expect to be realized over the period of three years. Moving to the North American market, we recently secured mid-six figures SaaS contracts with a leading automotive leasing company covering all of Canada for a key automotive brand to provide access to at least their cloud products. I would also like to point out that this win came up to a particularly long selection process, so we are happy to have come away with the business. However, deals like this continue to underscore the enhanced challenges in selling new business to a mature market such as North America. Also, a more general update that applies to all our major regions, collectively, this quarter we were able to generate an additional nearly $2 million through successfully implementing change requests from various customers across the globe. We have said it before but it bears repeating, these change request although sometimes small, are quite beneficial to our overall results when collected in aggregate. And furthermore, they are indicative of the growing desire we see in the market for a more complex personalized solution tailored to the organization with home view work [ph]. While it's not something we can necessarily factor into our projection, we plan to treat it as both, a secular tailwind, as well as further evidence supporting our dual branch go-to-market strategy. Moving to a few miscellaneous items before we turn it over to questions; first, as you may see from the press release we issued last month, we have further strengthened our international management by appointing Hui Liang as NetSol's new President for China, Hui will be responsible for expanding our already strong footprint in the APAC region and improving existing relationships with key customers. He brings multiple decades of experience within the broader technology landscape, but his expertise within the enterprise office space is where we believe he will be able to provide immense value to our operations in China. We Look forward to him playing a key role on the leadership team as we continue to evolve into an even more dynamic organization in China and globally. Moving towards our innovation lab, our small but dedicated team has continued to make progress on a number of key proof-of-concept or POCs. In the past few months which include, number one, a customer retention focus AI model which has completed POC and waiting pilot kick-off within major existing customer. Second, a connected car implementation that will be using IoT simulated data to capture real-time driving behavior. And third, a car-sharing platform built on numerous emerging technologies such as block chain, IoT, and Big Data. We are continuing to see good progress from our team which is being led by our Chief Innovation Officer, Murad Baig [ph], and we are excited to be following the tremendous progress moving forward. Finally, we recently signed a contract to secure the diamond sponsorship at the auto-finance summit, as well as Auto Finance Accelerate coming up later this year. The diamond sponsorship is the top billing but these major industry events and this monitor is heavily committed among our competition. We believe the additional exposure at a particular industry, events like AFA will be a big benefit to NetSol's name, brand recognition, and should help to generate additional sales for our team in 2019. Looking to the second half of our fiscal year, we have a number of reasons to be optimistic about the future. I feel excellent and excited about NetSol's growth outlook. I truly feel we are in the strongest position to-date. Our total global sales pipeline continues to provide us with near-term opportunities to generate improving results in the current fiscal year and we have also identified new long-term prospects who have registered their respective interest in NFS Ascent, digital and legacy solutions across various regions. These opportunities [indiscernible] combined with their optimized cost structure give us the high degree of confidence in our ability to generate healthy top and bottom line results for the remainder of the year. Furthermore, we remain firmly positioned to achieve our previously stated goal of double-digit top line growth for fiscal 2019, and look forward to providing updates on our continued progress in the months ahead. And with that I'd like to open the call up of questions. Operator?

[Operator Instructions] Our first question will come from William [ph] with ROTH Capital Partners.

Hi, Najeeb. The outlook sure seems to be top heavy weighted towards auto which is great but could you touch on banking asset financing and equipment financing opportunities as well?

Yes. Good to hear from you. As I mentioned, the outlook which combines all 3 regions which is APAC, The U.S. and Europe, are to deal with two different sectors. One is of course, auto captive finance companies who are our seldom our current customers. In China for example, we have the largest number of customer in one market, it's China, close to 28 customers. They are -- quite a few of them are working with us on transitioning to Ascent. And then their customer who are brand new in all the region in the same auto captive sector. In the banking we have few deals in pipeline, particularly in Australia and Indonesia. I think we look out the interest to see how they pan out in coming months, a couple of them are also in the European market.

[Operator Instructions] Our next question comes from the line of Shamu Qureshi [ph] with EMP.

Hi Najeeb, a great quarter there, congratulations on it. I wanted to ask you; it seems like really you're getting implementations in a wider group of countries and getting it to markets where -- again, you maybe have some limited experience or you haven't been before. Can you just talk a little bit or Naeem [ph] also may chip in just about how that looks like as an opportunity for you going forward?

Yes. Naeem [ph] is actually on a meeting in Germany so he could not be on the call today; so let me give the best shot. Look, first of all, if you focus on APAC market which is again our biggest market in terms of so many countries we support us for so many years, but we have enough locations to support every customer possible whether they are new customer or existing customer. China is a very big set up in Beijing, very big set up with a lot of people on-site and of course from off-site coming to work through BMW, for example, implementation which is happening as we speak with you, in the coming months they'll go live. And then of course, our bigger contract which [indiscernible] as you all know is also on-track. So we are managing very well given the scale of people we have in all these offices and as you go to Australia and other markets in Asia, we have local teams in place, some they fly from Lahore, some they are based in the local offices. And if you go to UK, we have a solid team; we just build a small new office in London that would just focus on Ascent related business activities and same thing we have a small team in the U.S. operations because -- of course, so far we are pushing very hard to a win from Ascent deals but there is ample team [ph] more in the front line and also in the back office in Lahore. So we are pretty good in terms of experience and our capability to support all the implementation in the timeframe that we did with the customers.

Najeeb, can I just add to that?

Go ahead, Jeff, please. Thank you.

I think another thing that's important to realize here is that this has further proved that the Ascent platform is a good improvement technology whereas we see some of our peers in the industry go into a new country and it might take 3 to 5 years and sometimes they even fail before they get live. We're literally going into new countries just about every quarter I've seen, and we're able to implement rapidly from a matter of months to a year or just over a year and do it very successfully. So this shows just how flexible and how viable the NFS Ascent platform really is and I think that's a testament for the development team at Lahore.

Our next question comes from a line of Micheal Vermont [ph] with Newland.

Hi, Najeeb and everyone else, excellent quarter out there. My question for you; can just go in a little more detail on I guess the competitive bidding landscape in the U.S. and Europe. Are we making any real traction on the pipeline? And what it takes to get some larger wins here? And also utilizing the wins that we've gotten recently in Asia, using those customers and moving -- they have large operations here in the U.S., you know, moving and getting some wins domestically?

Yes. I think I'll focus on China and some regions in APAC and we have Jeff come in to talk about U.S. Look, we have -- the fact that we are going live in China for the driver [ph] contract within next two months. That will be one of the biggest event in the company because that is a very large implementation and high volume. So -- and because in terms of value that we've generated from that one market alone, that kind of reference is -- I think you can't get any better reference for further new opportunities and that's how in our industry the customer looks for references of the biggest customers and going live on timeframe, and then customer is happy with the new system. So that to me is a single one reason for us to generate more revenue, bigger pipeline; but also it shows that our company has enough capability and maturity in last 20 years that we can take on a bigger project, bigger name customer, bigger markets now. And then of course, we have many other activities within the whole region. I think the company is in a good position when we look at our existing customer base; to my first question answer that we have huge number of deals in pipeline. In the whole region, not just in China -- China, of course, is the biggest concentration but there are other countries also within the whole region that is really right for the new deals. UK, we certainly do some different traction last two months, we signed one small deal I'll mentioned in my prepared remarks but definitely we are seeing some interest in Ascent and our sales team is very active in different conferences and meeting with a lot of new customers, both in the auto sector and of course in banking. But in the U.S. there is a lot of efforts and I think the pipeline could not be more healthier. I think I'll let Jeff take up a step on this thing. Jeff, go ahead, please.

Yes, sure, thanks Najeeb. Hi, Mike, good morning. Actually I think I'll give the simple and short and sweet answer. I literally just got back from Lahore, Pakistan yesterday, and rushed into the office this morning to be able to be here for this call. The reason for my trip over there was to work with my senior exec colleagues from the APAC market on a global client management initiative so that we are, indeed as you mentioned or as you asked, leveraging those contacts and those relationships from the APAC market to see what we can do here. So we continue to really look at these customers as not just reasonable global customers, and we're working hard. And I think also just as a testament to our commitment to really elevate the brand value here in North America, we did secure that Auto Finance Summit diamond or top level sponsorship which is a massive, frankly year-long branding exercise from NetSol in this market place to just gain more and more traction. So we do continue to work it, we do see some opportunities from the global clientele, as well as Najeeb mentioned, just -- even the local pipeline potential opportunity is looking good.

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 emailing them at ntwk@liolios.com, or by calling them at 949-574-3860. I'd now 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 committed support and our dedicated employees worldwide for their ongoing contributions. We look forward to updating you on our next call. Thank you.

Thank you for joining us today for NetSol's fiscal second quarter earnings call. You may now disconnect.