NetSol Technologies Inc (NTWK) 2019 Q1 法說會逐字稿

Good morning, and welcome to the NetSol Technologies Fiscal First Quarter 2019 Earnings Conference Call. On the call today 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 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. Please proceed.

Good morning, everyone, and thank you for joining us. Following the review of the company's business highlights and financial results, we will open the call for questions. 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 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 non-GAAP financial result to their most comparable GAAP measure.

Finally, I would like to remind everyone that this call will be recorded and made available to 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. I'm delighted to be calling in today from our NetSol Technologies campus in Lahore, Pakistan. This campus is our center of excellence where we provide a software development and implementation that support our clients worldwide. This is our engine for product delivery and growth.

The first quarter represented another solid performance for NetSol across the board. Most notably, we grew our top line 28% year-over-year, which was capitalized by initial license fee, revenue recognition from some of the major contract wins we announced over the past few months, which I plan to discuss a bit again today.

Focusing on the bottom line, we continue to reap the benefit from our immensely improved cost structure, registering close to another $1 million in net income in Q1 and improving our EPS number by $0.11 per share over a loss in the first quarter of 2018.

In addition to improving our overall profitability metrics, there are several other positive secondary consequences that our cost-reduction initiative will enable going forward. Logistically, we have created more headroom and capability to scale our business, which we believe can support a significantly greater amount of revenue without requiring a meaningful incremental investment to back it.

You are already starting to see this leverage in our model via the impressive gross profit and margin improvements we registered over the prior year quarter.

Given that not a lot of time has passed since we reported our fiscal year-end 2018 earnings, today's call will be briefer in nature, and I don't plan to replay the events we mentioned just a few weeks ago. And after the overview of the quarter's financials, I will -- I plan to recap some of the major highlights from this fiscal first quarter as well as spend a little more time on some of our ongoing initiatives before finishing with an updated outlook for the rest of the year. But before I get into those item, I'm going to ask CFO, Roger Almond, to walk us through the financial results for the quarter. Roger?

Thanks, Najeeb. Turning to our fiscal first quarter 2019 financial results ended September 30, our total net revenues for the first quarter were $16.4 million compared to $12.8 million in the prior year period. The increase in total net revenues was primarily due to an increase in total license fees of $5.6 million and an increase in total maintenance fees of $163,000, which were offset by a decrease in total services revenue of $2.2 million.

Total license fees in Q1 were $6 million compared to $370,000 in the prior year period.

The increase in total license fees was primarily due to license revenue recognized with a 5-year contract that was filed with the Tier 1 at European auto captive finance company to implement our NFS Ascent platform in China.

Total maintenance fees in Q1 were $3.7 million compared to $3.6 million in the prior year period. The increase in total maintenance fees for the quarter was primarily due to the start of new maintenance agreements with customers who went live with our products. We anticipate maintenance fees to gradually increase, as we implement both our NFS legacy product and our NFS Ascent product.

Total services revenue for the quarter were $6.7 million compared to $8.9 million in the prior year period. The decrease in total services revenue for the quarter was primarily due to a decrease in related-party revenues from our joint venture with one insurer of approximately $1.1 million.

Total cost of revenues was $8.2 million for the first quarter compared to $8 million in the first quarter 2018. The increase in cost of revenues for the quarter was predominantly driven by increases in travel and other expenses, which were offset by decreases in salaries and consultant's cost as well as depreciation and amortization cost.

Gross profit for the first quarter fiscal 2019 was $8.2 million or 50.2% of net revenues, which was up from $4.8 million or 37.5% of net revenues in the first 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 $3.6 million, which was offset by a minor increase in cost of revenues of $152,000.

Operating expenses for the first quarter increased 12% to $6.6 million or 40.5% of net revenues from $5.9 million or 46.3% of net revenues in the same period last year. The increase in operating expenses for the quarter was primarily due to increases in research and development and general and administrative expenses, which were offset by decreases in selling and marketing expenses and depreciation expenses.

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 $1.6 million for the first quarter, an increase of $2.7 million from a net loss from operations of $1.1 million in Q1 of last year.

Our GAAP net income attributable to NetSol for the first quarter fiscal 2019 totaled $963,000 or $0.08 per diluted share. This compares with a GAAP net loss of $369,000 or $0.03 per diluted share in the first quarter last year.

The increase in GAAP net income attributable to NetSol was primarily due to the increase in total revenues of $3.6 million, as discussed a moment ago.

Moving to our non-GAAP metrics. Our non-GAAP adjusted EBITDA for the first quarter fiscal 2019 was $2.2 million or $0.19 per diluted share compared with non-GAAP adjusted EBITDA of $970,000 or $0.09 per diluted share in the first quarter of 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 noncontrolling interest in our subsidiary. We believe this supplemental disclosure provides additional insight into the true operational performance of our business. Please see reconciliation schedules containing our earnings release for our revised calculations of adjusted EBITDA for the fiscal first quarter ended September 30, 2018.

Turning to our balance sheet. At quarter end, we had cash and cash equivalents of approximately $20.4 million or approximately $1.78 per diluted common share, which was up from $8.6 million or approximately $0.77 per diluted common share at September 30, 2017.

That concludes my prepared remarks. I'll now turn the call back over to Najeeb. Najeeb?

Thank you, Roger. As I alluded during my opening remarks, we had a stellar quarter through and through top to bottom. On a general level, we saw a return to growth that we expect to continue through the rest of the fiscal year as well as our fourth consecutive quarter of profitability.

As most of you are aware, the fiscal first quarter is usually our slowest due to traditional seasonality-related issues. And while our results on a sequential basis remain relatively even, on a year-over-year basis, we did a great job fighting through the typical malaise of the period and delivered strong results, which will serve as a springboard for the rest of the fiscal year.

Also, I mentioned earlier, the strong top line improvement we saw in Q1 was a result of initial revenue recognition on some of the major contract wins we have announced over the past few months.

Going forward, we feel that these marquee wins will not only bolster our results as we work through the implementation process, but they will also serve as additional proof points that support the quality of our product and further confirms the market's growing demand for Ascent.

To briefly recap, in August, we announced an initial 5-year contract valued at $30 million at least to implement both Ascent retail and wholesale platforms in China for a European auto manufacturer giant, which is BMW. 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 shareholders value.

Additionally, in September, we announced a new multimillion-dollar contract with one of the leading American multinational auto manufacturers to implement NFS Ascent retail platform in China. This Fortune 500 customer has been a titan of industry from the very beginning and has also grown into a significant Tier 1 player in China for the last 15 years. So we are obviously, looking forward to a successful implementation and to growing our relationship with this customer in the coming months.

We also commenced a data migration project for an existing customer, which is expected to generate approximately $0.5 million in additional revenues for the next few months. More recently, last month, we were selected by a U.S. company by the name of Speed Leasing to implement both our LeasePak Cloud, SaaS platform and mAccount platform powered by the NFS Digital suite.

LeasePak Cloud with the integrated mAccount seamlessly enables customer self-service on popular mobile platforms or any web device. I made mention of our innovation lab on some of our previous calls, but I would like to spend a little bit of extra time today to provide an update on the progress we made in this initiative more recently.

As a reminder, the NetSol innovation lab looks at harnessing creative technologies and especially fintech products, which will have a major long-term impact on both asset finance as well as the general shift to mobility-focused products. Our method to accomplish this employs a 2-pronged strategy.

First, what we refer to as whole innovation track focuses on future proofing product road map for both NFS Ascent and NFS Digital. We do this through the selective application of creative technologies like artificial intelligence, machine learning and blockchain with the goal of enhancing the current platform of auto and wholesale finance. More simply, we're looking for ways to produce increased efficiencies in the overall process as well as technology.

Second, we've been working directly with our customers across the globe to funnel the best or most readily addressable problem statements and developing proof of concepts, or POCs, for early discovery, design and implementation. Once a POC successfully reaches the final stage, we can then build a minimum viable product for commercialization.

On a general level, here's why we think this is the best path forward. While we are looking at the broader fintech landscape in areas that are definitely in early stages of development, we're able to apply our technological savvy and experience in building world-class products for a mature market and work directly with our existing customers in those markets to tackle future problems they specifically want addressed.

Not only does this process improve our relationship with existing blue-chip customer base, we are able to help -- helping to build a sustainable competitive advantage and barrier to entry well into the future.

At the beginning of the year, we appointed Murad Baig as our Chief Innovation Officer and tasked him with heading up the innovation lab. Murad come -- came to us from Deloitte, where he led innovation, blockchain and disruptive technologies across the firm's banking and securities practice. Murad is also part of Deloitte's U.K. fintech leadership team and contributed widely as a subject matter expert, providing general thought leadership as well as specific insights around how blockchain could be leveraged to create efficiencies in the financial service sector to the FCA and World Economic Forum. We think Murad is a rock star in the space and we're excited to see what he's able to accomplish under the NetSol banner for our business as well as our clients.

While we've always been optimistic about NetSol's prospects, it is still gratifying to be at a position where that optimism is starting to be shared more widely. The market is recognizing Ascent for the superior technological offering that it is and our numbers are starting to reflect that true. Now that we've gone through the necessary restructuring, we are trying to continue building on our initial quarterly growth as a leaner, more focused organization.

Looking further ahead, we are reiterating our previously stated prediction of double-digit top line growth over the whole of the fiscal year. We believe that the company is situated to meet a full year revenue number of up to $70 million, given the information and internal projections we have at this time. While we believe current facts support us, we plan to provide updates on our progress in subsequent quarters.

Simply put, NetSol is healthier, stronger and better than we have been for some time. We continue to work through the -- through our prodigious pipeline, focusing our efforts on the larger revenue opportunities, with longer-term sales cycles while still taking advantage of the smaller and mid-range deals we can expect to close on a shorter time line and in a more consistent manner.

This diversified mix of new opportunities has us strategically positioned to continue building on our leadership position in the APAC markets while continuing our expansion efforts in Europe as well as in North America.

Moving forward, our focus remains on positioning NetSol to be able to effectively capitalize on the significant long-term opportunity in the massive global asset finance and leasing industry while also profitably scaling our business. And with that, I'd like to open the call up for questions. Operator?

(Operator Instructions) 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 e-mailing them at ntwk@liolios.com or by calling them at (949) 574-3860. I would now like to turn the call back over to Mr. Ghauri for any closing remarks.

Thank you for joining us today. And I especially wanted to thank our investors for their continued support and our dedicated employees for their ongoing contributions. We look forward to updating you on our next call. Operator?

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