NetSol Technologies Inc (NTWK) 2018 Q4 法說會逐字稿

Good morning, and welcome to NetSol Technologies Fiscal Fourth Quarter and Full Year 2018 Earnings Conference Call. On today's call are Najeeb Ghauri, Chairman and Chief Executive Officer; Roger Almond, Chief Financial Officer; Naeem Ghauri, President Global Sales; Jeff Bilbrey, President, North America; and Patti McGlasson, General Counsel.

I would like now turn the call over to Patti McGlasson, who will provide the necessary questions 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 up 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 a 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. Before the market opened today, we issued a press release announcing our results for the fiscal fourth quarter and full year ended June 30, 2018, and a copy of which is available in the Investor Relations section of our website.

Fiscal 2018 signified a major transformational shift for both our business and for the greater financing landscape. Unlike all major changes, it has not always been easy. In our case, however, much of the change has been for the better, and we are looking forward to a new start and a bright future, a future that is already well underway.

To that end, the fourth quarter was a solid and eventful year for NetSol. From a financial perspective, we successfully achieved our third consecutive quarter of profitability and grew our top line to 15% over Q4 2017 and continue to improve our cost structure immensely.

Many of you know that over the course of the past year or so, we have been focused on removing distractions as well as other components that will be nonessential to NetSol's long-term operational strategy. One of the ways this focus has become manifest is through a major cost reduction initiative, which I'm proud to say, has now saved the company $8.5 million in fiscal 2018, which was a major driving factor in our $9.3 million increase in annual and net income over last year. Moreover, we increased our earnings on a per share basis from a loss of $0.46 in fiscal 2017 to a gain of $0.38 in fiscal 2018.

In the fourth quarter alone, we were able to generate $1.8 million in savings on cost of revenues and another $0.5 million from operating expenses.

Further to this point, within our company-wide strategic initiative to become a leaner, nimbler and much more efficient company, we also conducted a comprehensive internal review of personnel and processes. After their review, our focus has been on rationalizing cost at every level, every department; and primarily, human resources, or HR areas that would not be critical to the long-term growth of our company.

In total, we ended up in reducing our headcount to less than 1,400 employees from a high of 1,800 in 2017. While not easy, the decision has drastically improved our key fundamentals. Going forward, we remain focused on additional areas of organizational optimization to remain one of the most competitive IT companies in our industry.

On the operations side, the fourth quarter and even this current quarter have been filled with a torrent of sales activity and some very notable wins, which I will discuss in detail a little later.

But before I go any further, I now like to turn the call over to our CFO, Roger Almond, who will walk us through the financial results for fiscal fourth quarter of Q4 and the full year 2018. Roger?

Thanks, Najeeb. Turning to our fiscal fourth quarter and full year 2018 financial results ended June 30. Our total net revenues for the fourth quarter were $16.6 million compared to $14.5 million in the prior year period. The increase in total net revenues was primarily due to an increase in total license fees of $122,000, an increase in total maintenance fees of $206,000 and an increase in total services revenue of $1.8 million.

For all of fiscal 2018, total net revenues were $60.9 million compared to $65.4 million in fiscal 2017. The decrease in total net revenues was primarily due to a decrease in total license fees of $11.6 million, which was offset by an increase in total maintenance fees of $332,000 and an increase in total services revenue of $6.8 million.

Total license fees in Q4 were $3.4 million compared to $3.3 million in the prior year period. For the full year, total license fees were $6.9 million compared to $18.5 million in fiscal 2017. The decrease in license fees for the full fiscal year is primarily due to the $16,345,000 of licensed revenue recognized for the 12 country NFS Ascent contract recorded in 2017. Total maintenance fees in Q4 was $3.8 million compared to $3.6 million in the prior year period.

For the year, total maintenance fees were $14.8 million compared to $14.5 million in the prior fiscal year. The increase in total maintenance fees for the quarter and year was primarily due to the start of new maintenance agreements from customers who went live with our product during the latter stages of fiscal year 2017 and into fiscal year 2018. We anticipate maintenance fees aggressively to increase as we implement both our NFS legacy product and NFS Ascent.

Total services revenue for the quarter were $9.4 million compared to $7.6 million in the prior year period. For the full year, total services revenue -- total services revenues were $39.3 million compared with $32.4 million in the prior fiscal year. The increase in total services revenue for the quarter and year was primarily due to an increase in services revenue associated with new implementations and change request.

Total cost of revenues was $8.1 million for the fourth quarter, a decrease of 18% from $9.9 million in the fourth quarter of 2017.

For fiscal year 2018, cost of revenues was $31.7 million, a decrease of 14% from $37 million in fiscal 2017. The decrease in cost of revenues for the quarter and year was predominantly driven by a decrease in salaries and consultant costs as well as travel expenses and appreciation in amortization.

Gross profit for the fourth quarter of fiscal 2018 was $8.5 million or 51% of net revenues, up from $4.6 million or 32% of net revenues in the fourth quarter of fiscal 2017.

Gross profit for fiscal 2018 increased to $29.2 million or 48% of net revenues, which is up from $28.4 million or 43% of net revenues in fiscal 2017. An increase in gross profit for both the quarter and year was primarily due to a decrease in cost of revenues of $1.8 million and $5.2 million, respectively.

Operating expenses for the fourth quarter decreased 6% to $7.4 million or 45% of net revenues from $7.9 million or 55% of net revenues in the same period last year. Operating expenses for fiscal 2018 decreased 11% to $22.6 million (sic) [$26.2 million] or 43% of net revenues from $29.4 million or 45% of net revenues in fiscal 2017.

The decrease in operating expenses for both the quarter and year was primarily due to decreases in selling and marketing expenses, depreciation and amortization and provision for bad debt, which was offset by an increase in R&D expense.

Moving forward, we plan on judiciously allocating additional resources to our R&D budget as we focus increasingly on our innovation-related initiatives.

Turning to our profitability metrics. Our net income from operations was $1.1 million for the fourth quarter, an increase from net loss from operations of $3.3 million in Q4 last year. Net income from operations for the full year was $2.1 million, an increase from a net loss from operations of $1 million in fiscal year 2017.

Our GAAP net income attributable to NetSol in the fourth quarter fiscal 2018 totaled $1.2 million or $0.10 per diluted share. This compares with a GAAP net loss of $3.1 million or $0.28 per diluted share in the fourth quarter of last year. GAAP net income attributable to net NetSol for fiscal 2018 totaled $4.3 million or $0.38 per diluted share compared to a net loss of $5 million or $0.46 per diluted share for fiscal 2017.

The increase in GAAP net income attributable to NetSol was primarily due to the decrease in cost of revenues of $5.2 million, the decrease in operating expenses of $3.3 million and the increasing gain on foreign currency transactions of $5 million. As I mentioned on our previous call, it's important to point out that included in our net income this quarter was a loss of $294,000 on foreign currency exchange transactions compared to a gain of $953,000 in Q4 of last year. For the full year, we experienced a gain of $5 million compared to $307,000 for all of 2017.

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 hasn't affected increasing our revenues but it also increases our expenses denominating 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.

Moving to our non-GAAP metrics. Our non-GAAP adjusted EBITDA for the fourth quarter of fiscal 2018 totaled $2.9 million or $0.26 per diluted share compared with a non-GAAP adjusted EBITDA loss of $851,000 or $0.08 per diluted share in the fourth quarter of last year.

For the full fiscal year 2018, non-GAAP adjusted EBITDA totaled $10.3 million or $0.92 per diluted share compared with $2.8 million or $0.26 per diluted share in fiscal 2017.

As we disclosed our earnings release in the fourth quarter of fiscal year 2016, we began revising our calculations of adjusted EBITDA to exclude the portion of adjusted EBITDA that is attributable to the noncontrolling interest in our subsidiaries. We believe this supplemental disclosure provides additional insights into the true operational performance of our business. Please see the reconciliation schedules contained in our earnings release for our revised calculations of adjusted EBITDA for the fiscal fourth quarter ended June 30, 2018.

Turning to our balance sheet. At quarter-end, we had cash and cash equivalents of approximately $22.1 million or approximately $1.97 per diluted common share, which is up from $14.2 million or approximately $1.30 per diluted common share at June 30, 2017.

Well, that concludes my prepared remarks. Now I'll turn the time back over to Najeeb. Najeeb?

Thank you, Roger. For today's call, I'll spend a brief amount of time discussing our results for fiscal 2018 as well as some of our big wins in the last few months. But I want to focus the remainder of my prepared remarks on our outlook for fiscal year 2019 and the plan we have in place to accomplish the lofty goals we have set for ourselves.

I'll start with some highlights of the major new wins we have recently announced, starting with the big one. For those of you who don't know, back in August, we announced an initial 5-year contract valued at approximately $30 million to implement both Ascent Retail and wholesale platform in China for a global auto manufacturing giant. And I'm excited to say for the first time, though, that we have finally been given the go-ahead to announce that this deal is with none other than the titanic company called BMW. So BMW is our second largest customer.

NetSol was chosen from a list of 4 potential vendors, all of which operate in the global auto and asset finance space. Our Ascent platform was selected for its unmatched reputation in successfully executing projects of similar size and scope. During the process, BMW also evaluated candidates based on technology stack, functional coverage, automation tools, digitization and platform strengths. And after an extensive due diligence process, Ascent was determined to be the most effective solution in terms of addressing the multilayered regulatory compliance and complex business processes in China.

The evaluation process for the deal lasted 2 years. Additionally, this agreement is consistent in size and value with major Ascent implementation we previously announced in China, further providing these extended sales cycles, which require more complexity as well as functionality, will ultimately lead to greater contract sizes over longer periods of time.

We view this deal as a major catalyst for fiscal 2019 as it solidifies our position as a leader in the space and will propel us to an even stronger position as we continue to execute on our strategy to drive long-term shareholder value.

Next, as you may have seen from our press release last week, we announced that we successfully went live in South Africa as part of the ongoing implementation process for our previously announced, which is now valued to at least $110 million with a different German auto captive. Going live in South Africa is more than another successful implementation. It also represents a big milestone for us as it marks our entry into yet another new international market.

Continuing to expand through successful implementations will be the precursor for ongoing success, and it showcases our expertise, efficiency and overall abilities of our deep industry insight and knowledge. Additionally, it provides us with an opportunity to refine the product on an ongoing basis to continually offer increasing value. We work diligently and tirelessly to bring this implementation live, hedge free within an extremely challenging timeline. South Africa marks the fifth deployment to go live, following successful initial implementation in Thailand, New Zealand, Australia and South Korea. Going forward, all of the remaining markets are on track, including the next major deployment in China, which is slated for early next year.

Also from last week, we announced a new multimillion-dollar contract with a major American multinational auto manufacturer to implement the NFS Ascent Retail platform in China. The agreement covers installation of the complete NFS Ascent Retail suite, including our Loan Origination System, or LOS for short, and Contract Management System, CMS, both of which will be integrated into the customers leasing operations. This new contract represents yet another proof point that both supports the quality of our product and further confirms the market's growing demand for our flagship Ascent.

This Fortune 500 customer has been a titan of industries very -- from the very beginning and has also grown into a significant Tier 1 player in China over the last 15 years. So we are, obviously, looking forward to a successful implementation and to growing our relationship with this new customer in the coming months.

The overall success so far of our flagship Ascent solution can be summarized in the following metrics. Ascent has now generated signed contracts with 6 customers in APAC, including China and 11 other markets, and Indonesia and the U.K. are valued at over $175 million over the lifetime of these agreements. To develop our next-generation solution Ascent, it costs us approximately $27 million. So put in another way, these 6 -- agreement with 6 customers represented a 7x return on investment from these contracted values, and we believe this is just the beginning for our flagship Ascent.

Which brings me to the pipeline. We have spent a great deal of time on previous calls discussing the elongated sales cycle for our business and what that means for NetSol. So we won't be revisiting that subject today, however, while that process remains ongoing, we feel that the effect of this shift for NetSol have now been almost fully realized. Perhaps, the best way to describe, what I mean is by looking at our pipeline as a whole, on a macro level, when you begin to move certain opportunities into the more mature phase of a sales process, what we try to do is replace any of those opportunities with ones that are more early stage. By doing this, the pipeline continues to be replenished in an efficient manner. It remains robust and smooth. For example, in a larger deal what used to take maybe 12 months is now taking up to maybe 2 years or twice as long in some cases. Therefore, with the goal of making revenue more consistent in line, we have backfilled the pipeline with other opportunities, some of which are quicker to get across the finish line. Optimizing this process has obviously taken some time, but we're now seeing the benefits of this strategy as evidenced by the success we had this quarter and highlighted and the notable recent wins I have just mentioned.

Now before turning the call over to questions, I'd like to finish with a discussion of our strategy as well as outlook for fiscal 2019. If 2018 was about transformation for NetSol, then the beginning of 2019 has represented the inflection point that will transition us into our next stage of future growth. After battling through extended sales cycle of fewer, albeit very large new contracts for Ascent, we're now ready to realize some of these -- those benefits.

Technically speaking, should we continue to win new contracts with Ascent and our other offerings, the financials should also follow in lockstep. To be clear, the company is fully focused on solidifying key fundamentals, such as revenue growth and operating income in the coming year and beyond.

We are already seeing some of that transition in the current fiscal year and expect this trend to continue. Simply put, top line growth will be the key goal for management in fiscal 2019. And it is with these estimations in mind, and I'm introducing an initial outlook for the next fiscal year. At this time, we believe, and it is our goal, that we can achieve double-digit top line revenue growth in fiscal 2019. This goal is subject to a number of operational milestones and other items going according to plan, but at this time, given the information we have, we feel very confident in our ability to execute on this plan. Additionally, we expect our margin profile to increase accordingly with improvements in our top line.

With our costs reduced and processes now optimized, we can go out and execute. However, that doesn't mean that we won't continue with a razor-sharp focus on economies of scale, creating what we are calling hyper efficiencies in areas that we were already efficient. And what's more? Our incremental costs, with these new contracts, are expected to remain under 21 -- under 20% of every new dollar in revenue being generated, which will allow additional opportunities to leverage the extra cash flow.

We have validated the quality of our offering through successful sales purchase and flawless implementations, and the market is now responding. With numerous deployments now under our belt for our flagship solution, we are anticipating a more robust growth trajectory in 2019 and onwards. As I just mentioned a moment ago, our management team is focused on key fundamental drivers that will lead to our future long-term success. I'll spend a minute here explaining exactly how we're going to do it.

First, we need to capitalize and build on our strong pipeline momentum in key APAC markets. More specifically, we look to grow our de facto leadership position in China, China leasing and finance in the Enterprise Resource Planning, or ERP domain. It bears repeating that the Chinese market represents a much different maturity cycle than what we think of in the U.S. Market penetration of leasing solution is steadily growing. Additionally, the Asia Pacific regions of Australia, New Zealand and Indonesia are also areas of expansion where we see near-term opportunities for new wins.

Second, we need to continue building new sales momentum for North America. While I just mentioned that this market is in a much more mature point of development, what we like about the North American opportunity is that we are able to more heavily plug our LeasePak Cloud offering, which is based on SaaS model. We do see chances for positioning Ascent within targeted potential customers, and we'll continue to monitor opportunities as they arise.

These opportunities dovetail nicely with our third key strategic area of focus, the U.K. and European markets. Within these markets, we have already begun the process of repositioning our sales and marketing strategy to focus specifically on Tier 1 captive and bank for Ascent. Overall, we are seeing increased concentration in midsized new deals, valued generally under $20 million for Ascent. As I mentioned when speaking about our overall pipeline, the sales cycle for conversion from legacy systems to Ascent is much shorter, and it allows us to build nice momentum in making longer deals of larger size and scope.

Put together, we have already commenced aggressive marketing campaigns in all 3 of these major markets for us, and we expect the results of those campaigns to be realized over the course of this year.

One of our models at NetSol is innovation is in our blueprint. While that's a catchy slogan to be able to market our business, we really do take that message to heart in many of the long-term decisions we make for the future of the company.

We're continuing to make great strides in our innovation lab. I recently hired Chief Innovation Officer, Murad Baig, and his team have been working on several proof of concepts to create more value and functionality for our existing global customers and partners as well as expand to new markets. In particular, the lab has been quite busy exploring the many possibilities that blockchain technologies and tools can realistically provide for our global client base. We're also working on expanding our cloud solution within our existing product portfolios, with an emphasis on digital transformation and in the financial services industry.

It bears noting, however, when making plans for the future and how to best orient our sales to be successful, it is very easy to get caught up in the new technologies I just discussed. However, it is not always such a rosy think tank of discussion. Sometimes you have to make difficult decisions, decisions that you know works best for the company but are not always easy. But most of those hard decisions have now come to pass and as you are now beginning to see, many of the difficult choices we had to make have now begun to bear fruit and will continue to serve us well as we look to scale our operations in fiscal 2019.

We have recognized that there is a broader paradigm shift going on in our industry with digital and mobile solutions being desired and required by our existing and new partners. And no other company in our industry is better equipped to meet these changing demands.

With NetSol's leading technological offering and our leaner organizational structure, we are in an ideal position to reap the rewards of our patience and planning.

The future is bright. And we can clearly see the path to generating long-term sustainable value for our shareholders.

And with that, I'd like to open the call for questions. Operator?

(Operator Instructions) Our first question is from Mike Vermut with Newland Capital.

This is Mike. Question for you. You did a phenomenal job on the cash side this quarter. I guess, now you have almost 1/3 of the company's market cap is in cash now. What's the outlook on it? I think you were still significantly undervalued by any metric here. Do we put more cash to work on buyback until the market realizes the value? Or are there other capital expenditures and whatnot we need? I assume we're going to be generating quite a bit of cash over the next year as revenues ramp up and the cost stays under control and margins increase. So what's the plan on the capital side?

Yes, Mike, look, this is a very strategic thing right now as our cash has improved. And I think it will remain strong given the need we've announced and the outlook we have just shared with you. So the cash will remain strong, I'm pretty confident. The second thing is, there is lot of strategic things happening with the company, and that is continuously investing in the company without disturbing our cost structures that we have just implemented very effectively. But there is, for example, we're expanding our channel operation, we're expanding our U.K. operations going into the mainstream Central London market to really go after the potential customers there. And then we're doing a lot of work in APAC, at the same time, we're doing a lot of work in Pakistan in terms of new lab innovation, and Naeem will give some color. So it's best to continue to follow the course and that is build the revenue, build strong bottom line and build the cash flow. And then if an opportunity comes our way, which is a synergistic or maybe opportunistic small M&A that can augment our offering or create more accretive revenue, which we have not done for the last 12, 13 years, as you know, pretty much grown organic. We may use that cash. Now the buyback, we've done a few times in the past, and if I were to come back or buy back again, and I get the board approval then we'll make sure that we'll execute all the way. So we always have that thought in mind, but definitely, that is an option always available to us, and we will see it much more carefully after the Q1 how we have performed, although I'm very optimistic. But I think, definitely, we believe, we want to continue investing in our company, making our balance sheet strong and eventually market is responding, we have been very active. Jeff and I have been very active. And in few conferences, we are able to get some new excitement. So I believe, eventually, with continued fundamental performance, the market will respond very well. Naeem, you want to say something?

Yes, the only thing I can add to that would be on the R&D side. Because we're going through several paradigm shifts in the market, Mike, there is disruption left, right and center. So we need to be ahead of similar disruption because some of that impacts the auto business in general, some impacts the finance companies, the shift is really not just on the business side, there are technological shifts as well. There is a lot of talk on blockchain. There is a lot we can do with machine learning. So we have an innovation map, and as Najeeb read from his remarks that we have a Chief Innovation Officer. So we want to very carefully evaluate different opportunities to develop some proof of concepts and see how the track with our clients. We have regular contacts with our clients. So we share with them some of the developments we're doing. So I think from time-to-time you'll hear about some developments in that area. That is a very exciting part of the company right now. There is -- very smart people in that group. And so that I think would need a degree of investment but it's going to be in line with the results we hope to achieve.

Excellent. And I got 2 more quick ones. On the expense side, I assume for the next 10%, 20% revenue growth is not much of fixed cost we need to add in there, I assume there will be some SG&A cost on the fixed side.

Yes. As I mentioned in my prepared remarks, Mike, and I've been saying that for the last few quarters is that we believe the company is so scaled, well scaled and efficient and meaner, we believe we don't have to add a lot more human resources. That is the biggest cost anytime you get bigger projects. Now we have announced 2 major projects, of course, the BMW and the one 2 years ago or so and then others in between. I think new projects, we believe, are pretty robust in terms of pipeline this fiscal year. We don't expect to add maybe more than 20%, under 20%. For example, we're hiring some key senior management role people in China and then a couple of new executives in the London market. Both are very strategic, but there is no mass hiring in place. If anything, we are always looking at our HR very closely, how we can generate more or less. So I don't believe that our costs will go up, maximum 20% if I can take a guess. We have done some math. I believe it will be much more a control structure, and that way, we can generate -- every revenue will generate the maximum of that goes on to the operating income and the net income.

Excellent. That's great. And then last question, when you look at the pipeline, is the pipeline growing in size when you look out over the next year, 1.5 years in number of customers, number of inquiries and what's out there? And then through that question, also, with the new customer, U.S. customer, are there chances of bringing some of that business into the U.S.?

There is a much likelihood of business coming to U.S. also from that large American customer that is on it. I know it. We know it. But Naeem will give you color on the pipeline. I think he's obviously the man on the ground. Naeem, go ahead.

Yes, the -- well, the good news is that some of the business that we signed and we have contracted, we've been able to replenish our pipeline and we're extremely busy. In fact, the situation sometimes is that we've prioritized which opportunities we should go after. There's a huge opportunity cost with these sales cycle if we get into one particular opportunity in a big way. But then you need to make sure the others don't get ignored. So we have to be very careful. So there is plenty of opportunity. There is no lack of interest. We've seen it growing considerably. So we're very busy. Especially in Asia Pacific, we're extremely busy. This client that we've signed up is already our client in the U.S., also. So there is always synergy. And there is obviously a crossover with the clients, they talk to each other, and certainly, when there's an opportunity in the U.S. with the same client, then we should be on their list. I'm pretty optimistic.

(Operator Instructions) Ladies and gentlemen, we have -- 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 ntwk@liolios.com or by calling them at (949) 574-3860. I would now like to turn the call over to Mr. Ghauri for his closing remarks.

Thank you. Thank you for joining us today. I especially want to thank our investors for their continued support and our most dedicated employees worldwide for their ongoing contributions. We look forward to updating you on our next call. Thank you, and have a good day. Operator?

Thank you for joining us for today's NetSol Fiscal Fourth Quarter and Full Year Earnings Call. You may disconnect.