NetSol Technologies, Inc. (NTWK) Q3 2022 Earnings Report, Transcript and Summary

Good morning. Welcome to the NETSOL Technologies Fiscal Third Quarter 2022 Earnings Conference Call. On the call today are Najeeb Ghauri, Chairman and Chief Executive Officer; Roger Almond, Chief Financial Officer; Patti McGlasson, General Counsel and Senior Vice President, Legal and Corporate Affairs. [Operator Instructions] I would now 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. Thank you, Patti. 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 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 the 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 the 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. With our third quarter performance, we remain on track to achieve our fiscal 2022 growth targets of 10% top line growth and 20% growth in recurring revenues. Importantly, for the nine months ended March 31, our team has far exceeded our target, growing annual recurring revenues by 34%. Our pipeline and mix of opportunities in our core business remained robust, particularly in our European and North American growth markets, giving us confidence in our ability to drive additional contract signing over the coming months. The rollout of our OTOZ digital platform in partnership with MINI Anywhere accelerated in the third quarter, we ended the March quarter with 17 dealerships subscribed 11 in California, and one in Texas and expanded this to a total of six states, adding dealerships in Florida, Pennsylvania, New York and New Jersey. In California we now live in 70% of the MINI dealerships, in Pennsylvania we've already captured 75% of all dealerships. In the long-term, this solution to my user base monthly mobility startup OTOZ, has the potential to be rolled out to over 100 MINI dealerships across all 50 states. Our employees continue to return to our global offices. We ended the quarter with nearly 40% of our employees back in our Lahore technology campus, which is home to the majority of our workforce and heart of our technology operations. Additionally, since the start of the fiscal year, we have increased our headcount by nearly 70 employees, mostly station in the national technology campus in Lahore, to support additional implementation work and innovation initiatives. Our results for the first nine months of fiscal 2022 clearly demonstrates we are delivering on our promise of returning to meaningful growth. And we are confident that the investments we will be making in our leadership, workforce technology and expanded sales efforts will lead outsized returns in fiscal 2023 and beyond. With this overview completed, I'll now hand the call over to our CFO, Roger Almond, who will walk us through the financial results of the quarter. Roger?

Thanks, Najeeb. Turning to our fiscal third quarter 2022 results for the period ended March 31. Our total net revenues were 14.8 million, compared with 13.8 million in the prior year period. The 7% increase in total net revenues was primarily driven by increases in subscription and support revenues of 900,000 and services revenue of 600,000, slightly offset by a decrease in license fees of 500,000. Total subscription and support revenues in Q3 were 6.6 million compared to 5.7 million in the prior year period. The increase was due to the new subscription licensing deals and increase maintenance related to the change with our Daimler Financial Services contract discussed on last quarter's call. Total services revenue for the quarter was 6.6 million compared to 6 million in the prior year period. The increase is primarily due to an increase in implementation services, revenue related to our GAC Sofinco contract, which increased from 927,000 in Q3 of fiscal year 2021 to 1.9 million in Q3 of fiscal year 2022 and offset by decrease of 400,000 among other customers. Total cost of revenues was 9 million for the third quarter, an increase of 1.6 million from 7.4 million for the third quarter 2021. The increase is primarily due to increases in salaries of 1.4 million, travel of a 105,000 and other expenses of 145,000. Gross profit for the third quarter for fiscal 2022 was 5.8 million or 39% of net revenues compared to 6.4 million or 47% of net revenues in the third quarter of fiscal 2021. The decrease in gross profit was primarily due to an increase in cost of sales of 1.6 million driven by increases in salaries and consulting costs of 1.4 million. Operating expenses for the third quarter of fiscal 2022 were 6.4 million or 43% of sales compared to 6 million or 43.3% of sales for the third quarter fiscal 2021. The increase in operating expenses was primarily due to increases in selling and marketing expenses offset by decrease in general and administrative expenses. Our GAAP net loss attributable to NETSOL for the third quarter fiscal 2022 totaled 300,000 or $0.02 per diluted share compared with the GAAP net loss of 600,000 or $0.05 per diluted share in the third quarter fiscal 2021. As I mentioned on previous calls, it's important to point out that included in our net income this quarter was gain of 500,000 on foreign currency exchange transactions compared to a loss of 1.8 million in Q3 of last year. Because we operate in several geographical regions a significant portion of our business is conducted in currencies other than the US dollar. A decrease in the value of the US dollar compared to foreign currency exchange rate generally has effectively increasing our revenues, but it also increases our expenses denominated in currencies, other than the US dollar. Similarly, as the US dollar gain 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 US dollar. Moving to our non-GAAP metrics, our non-GAAP adjusted EBITDA for the third quarter fiscal 2022 totaled 400,000 or $0.03 per diluted share compared with non-GAAP adjusted EBITDA of 200,000 or $0.02 per diluted share in the third quarter of fiscal 2021. Please see the reconciliation schedules contained in our earnings release for revised calculations of adjusted EBITDA for the fiscal quarter ended March 31, 2022. Turning to our balance sheet. At the quarter end, we had cash and cash equivalents of approximately 30.6 million or approximately $2.72 per diluted common share, which is down from 33.7 million or approximately $2.93 per diluted common share at June 30, 2021. One final note, before I hand the call back over to Najeeb regarding our financial outlook for fiscal year ending June 30, 2022, the company continues to expect total revenues to increase by at least 10% in subscription and support or recurring revenues to increase by at least 20%. This guidance is based on existing contracts and recurring revenue from its current customer base, performance results track through January this calendar year and other information available as of the date of this call. This concludes my prepared remarks. I'll now turn the call back over to Najeeb for an overview of our business update. Najeeb?

Thank you, Roger. I'll now provide updates within the major components of our broad strategy, recurring revenues from our SaaS and support segment’s recent annualized run rate of more than 26 million in the third quarter. As our workforce continues to return to onsite work across our global footprint, we anticipate this growth will continue to accelerate. As Roger just noted, our cash position remains strong, providing additional resources to support our core business as well as strategic investment in high written long-term opportunities, such as our work in the OTOZ innovation lab. And we are confident in the reiteration of our full year revenue guidance of 10% top line or $61 million net revenue for the year with 20% growth in our recurring subscription revenue. Another component of our growth strategy is in innovating new areas and looking to create technology and personnel partnerships, which can be a major benefit to our customers as well as our own organization. To this end, I'd like to take some time to provide a brief update on our progress within the OTOZ innovation lab. The most visible project within OTOZ in recent quarters has undoubtedly been our partnership with MINI Anywhere. As a reminder, OTOZ has been working with BMW Group Financial Services in the North America through its key brand MINI Anywhere to provide many USA customers with a fully digital shopping experience, empowering their marketing strategies and creating a new automated sales channel for dealerships and lenders. The OTOZ digital retail platform for MINI Anywhere has been featured across major publications, including Newsweek, Automotive News and ABC News. Since the launch at the end of the fiscal 2021, the new platform has quickly gained traction. As of quarter end, MINI Anywhere was live with 17 MINI dealerships up from just 12 at the end of December quarter. More importantly, we have now captured 70% of all California MINI dealerships and 75% of all dealerships in Pennsylvania, a state we just entered in the third quarter. In fact, we are now operating in six states up from just two at the end of December. In addition to Pennsylvania, we went live with dealerships in Florida and New York and New Jersey during the third quarter. We expect this early momentum to accelerate in the months ahead. The success of this program can be attributed to several factors and I'd like to share one data point we believe to be the most telling. Through the fiscal third quarter, we've been able to generate a blended lead conversion rate of 22% meaning for every five opportunities we identify through our platform one of those leads will convert to a vehicle sale. At the end of the first fiscal quarter this ratio was one to six. This performance in light of the global and well documented inventory shortages within the auto industry is a major reason why we are continuing to roll out our solution to more and more dealers as the weeks go by. We appreciate MINI’s belief in our product and team and are looking forward to the continued expansion of our regional partnership. Looking ahead, we'll be rolling out some major enhancements to the platform, including financing and insurance protection products with digital sales, as well as introducing additional support for used car inventory, which has been a popular request under current market conditions. The final component of our strategy is exploring in order organic opportunities including M&A, and joint ventures when it makes sense. On this note, I can share that we continue to evaluate opportunities in the marketplace that are highly accretive and strategic to our business. With this already completed, I will now go over operational updates for the quarter. Regarding flagship, our flagship NFS solution, we signed a contract with a European bank with multiple countries in scope. The contract hinges on a discovery phase, which is currently ongoing. This is NETSOL Europe's newest client, the strong potential of penetration in multiple countries in Europe. The New Zealand, Kubota project went live with a soft launch last August and the project is currently under transition into maintenance. Mapping to the Australian Kabuto project was completed during Q3 and have proposals submitted. Our previously announced multiyear multimillion dollar upgrade with a global automotive financial services company, GAC Sofinco in China continues to move forward, based on additional implementation configuration, we continue to anticipate a fall 2023 Go-Live and completed key activities during Q3 that set the stage for important delivery in May and July of this year. Now finishing with our North American operation. Last July, we continued -- we announced our first official sale of NFS Ascent in the US market and agreement with motorcycle group to deploy the cloud-based version of our flagship platform across the entire operations, including an only point of sale and contract management system to support retail, lending and leasing. Motorcycle group consisting of motor lease and motor loans, presents lease and loan offers simultaneously to qualified applicants so that motorcycle and powersports dealers can maximize their sales, enable customers to prequalify and select their vehicle through motorcycles advisors. The project implementation began in July and all required workshops now completed the expected go live remains on track for 2022. Going forward, we will be looking to leverage this breakthrough agreement to prospective clients throughout North America market. Looking ahead, our pipeline of opportunities within the APAC region continues to grow steadily, out of the pandemic induced halt in new business development. We are encouraged by the quality opportunities we are seeing in our largest market and believe the ongoing recovery in this region to be emblematic for a larger return to work across our global operations. Regarding our European and North American pipelines, these remain exciting new growth areas for NETSOL and we have strategically marketing our cloud and SaaS based offerings in these regions, which is contributing to the growing subscription and support revenues as noted earlier, we have a few large opportunities of our flagship ascent in the US, as well as several new opportunities in Europe specifically, that are making their way through the sales cycles. While we can’t control when some of these deals get signed, we believe our current momentum combined with a critical mass of potential deals bodes well for meaningful gains in the coming months. Our current pipeline of opportunity across North America remains the strongest near-term growth opportunity for our business, which is why getting these first implementations under our belt are so important. In summary, our strong performance in fiscal 2022 continues. We have seen healthy recovery in our -- 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 Todd Felte with Aegis Financial Services.

I noticed in the last conference call that you had mentioned that we would be going live in India through the Daimler Financial Services contract in early calendar 2022. We're into May now. Is there any update on when that will occur?

Yes. Thank you for asking the question, Todd. Yes, we did go live about a month ago in India, it's all live and running very well.

Okay. I appreciate the color on that. Also, I've been looking at the financials here, and it seems we're under a little bit of margin pressure. I know our revenue has gone up in the 9 months, a little over $4 million, but our gross profit is flat and our income from operations is down a little bit. Is there a plan to kind of deal with this and improve margins? Or is this just kind of a temporary problem caused by inflation and increasing labor cost?

I think it's actually a couple of points I want to add to that question, Todd. One is, as company has pivoted almost over a year ago to SaaS model in relation to our license sale, so you'll notice, our SaaS revenue is growing, the recurring revenue is growing at the expense of sometimes large license implementations or contracts, that doesn't mean that we're not going to -- we're not busy with the license opportunities in some regions like the U.S. and Asia that will continue to improve our revenue as well as gross margin. And second thing is, as you noticed, as Roger mentioned, we hired a few people in the last 2 quarters, primarily to support our new initiatives, whether they're innovative related or ongoing businesses, opportunities in North America, particularly, we are in an investment mode in the U.S., in North America, especially both Canada and in U.S. by hiring new people to really position ourselves to be a stronger, an operator in the U.S. market, which we haven't been in the past. So I believe all these investments in hiring more technology-related personnel, paying better salary because the market conditions are so much in demand for these technology professionals all over the world. Even in a home country where we have the major workforce. So it's the time to invest in people, bring new talent and look at the future. So this is why the margins are a bit shrinking. So -- but this is temporary. I think it will improve as the sales growth to continue to improve and have you more, I think economy of scale in this operation worldwide and then I think we can really look at a much better gross margin. Historically, we've been over 55%, 50%, and I intend to improve that to that level in the coming quarters.

Okay. That’s great to hear. And then finally, my last question. I look at the stock and we’ve got a book value of around $5 a share. And the stock really hasn’t done much. If you look at it, even going back a couple of years to 20 years. It doesn’t really seem like shareholder value is being maximized. Is there any update with the share buyback program, which I know we’ve had some of those in the past or possibly the initiation of a dividend to return a little value to shareholders?

Look, we have done a very effective buyback program a year ago. I mean it’s almost close to 1 million shares, invested almost $3.5 million, made $4 million at that time. Right now, what we’re looking at is 2 major, I think, opportunities and challenges. One is, of course, globally, all the difficult time whole 3 regions are facing North America and Asia and of course, Europe. You know what those macro challenges are. And it also sometimes slows down the activity. But at the same time, the cash we have in the bank is really, I believe, well served to invest in the company, invest in the right talent and in some new technologies. And we also know what is out there 6 months from now or 3 months from now, are we heading into a recession or are we already in recession? So company to be very careful to preserve the cash to invest in the right place. And the time will come if we see that we have enough cash that we can allocate to another buyback program that without disrupting or without continuing our growth strategy and the things we’re doing, I think that’s when we can go back to board and extension of a buyback. Right now, we’re already in a good place to invest carefully, improve our cash flow reserves and make sure the company is strong financially to weather all the difficult times facing the world.

[Operator Instructions] Okay. At this time, I'm not seeing any other questions. I'd like to pass it back over to Najeeb for any closing remarks.

Thank you, everyone, for joining our call today. I appreciate your support and your patience in this company. And I think we'll continue to do our good work and try to make better progress in the coming quarters and coming years. But thank you again, and we see you next time. Goodbye.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.