NetSol Technologies Inc (NTWK) 2019 Q2 法說會逐字稿

Good morning. Welcome to 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 will 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 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'd 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 core -- our center of excellence, where we provide software development and implementations 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 is unique asset to our organization. According to the Pakistan Bureau of Statistics, the country of Pakistan is the fifth most populous at 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, very high quality talent pool, which has benefited our customers for over 20 years. This talent pool of software engineers is second to none. Now to our results.

The second quarter represented yet another strong consistent performance for NetSol. We followed up our encouraging 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've 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 effects as it relates to our forensic. Put another way, with 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 has steadily improved almost in lockstep.

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 $330,000 in Q2 last year. We feel this growth is strong evidence supporting our plan. That said, we are always looking for ways to improve these processes and make them more cost efficient. But it is nice to see the progress we have made thus far. Looking at the operations side of things, our successes were produced by the same formula 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 have continued 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 an additional license fees from our ongoing implementation for the larger, less regular contracts. Beyond implementation, these contracts will also translates 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 license fees of $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. Increase in total license fees was primarily due to license revenue 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 fees to gradually increase as we implement in 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 revenue is 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. The increase in cost of revenues in the third quarter was predominantly driven by increases in travel and other expenses, which were offset by decreases in salaries and consultant 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 revenues 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 cost of 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. The increase in operating expenses was primarily due to increases in salaries and wages, research and development and professional services, which were 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 initiatives. Other income for the second quarter included $2.5 million of currency exchange gain 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 Pakistan 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 from a 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. The increase in 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 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 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 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 was up from $10 million or approximately $0.90 per diluted common share at December 31, 2017.

That concludes my prepared remarks. I'll now turn the call back over to Najeeb. 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 for 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 yourselves too much. In light of that maxim, my comments 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 multiyear international deployment associated with the previously announced 12-country $110 million contract with a major Germany auto -- multinational auto manufacturer, we have successfully commenced on the implementation process of our NFS Ascent wholesale module in Japan. Since the takeoff 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 thereafter. Given the overall size and scale of the 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 will 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 wins 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 projects in the coming quarters.

Regarding the other major deal we announced last quarter, which was with the captive auto leading company of a major U.S.-based auto manufacturer with strong position in China, I'm happy to say that we have officially commenced the implementation of the Ascent retail platform for this Fortune 500 company. In Europe, we successfully signed a new contract with a notable U.K. auto finance company. This deal carries a total contract value in the mid-6 figures, which we expect to be realized over a period of 3 years. Moving to the North American market, we recently secured a mid-6 figures SaaS contract with the leading automotive leasing company covering all of Canada, for a key automotive brand to provide access to a LeasePak Cloud product. I would also like to point out that this win came after 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 and applies to all our major regions. Collectively, this quarter, we were able to generate an additional nearly $2 million through successfully implementing chain requests from various customers across the globe. We have stated before, but it bears repeating, these chain requests, although sometimes small are quite beneficial to our overall results when collected in aggregate. And furthermore, they are indicators of the growing desire we see in the market for more complex, personalized solution tailored to the organization with whom we work. 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-pronged go-to-market strategy. Moving to a few miscellaneous item before we turn it over to questions. First, as you may have seen from the press release we issued last month, we have further strengthened our international management team 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 to our efforts in our innovation lab, our small, but dedicated team has continued to make progress on a number of key proof of concepts or POCs. In the past few months, which include, #1, a customer retention focus AI model, which has completed POC and is awaiting pilot kick-off with a major existing customer; second, a connected car implementation that will be using IoT simulated data to capture real-time driving behavior; and third, a cloud-sharing platform built on numerous emerging technologies, such as blockchain, IoT and Big Data. We're continuing to see great progress from our team, which has been led by our Chief Innovation Officer, Murad Baig, and we're 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 for these major industry events and this monitor is heavily committed among our competition. We believe additional exposure is at a pinnacle industry, event like AFA will be a big benefit to NetSol's name brand recognition and should help to generate additional sales to 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 a 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 solution across various regions. These opportunities overall combined with our optimized cost structure give us a 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 continuing progress in the months ahead.

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

(Operator Instructions) Now our first question will come from William Gibson with Roth Capital Partners.

Najeeb, the outlook sure seems to be top-heavy weighted towards auto, which is great. But could you touch on the bank and 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 do with 2 different sectors. One is, of course, auto captive finance companies, who are -- some of them are our current customers. In China, for example, we have the largest number of customer in 1 market is China, close to 28 customers. They are -- quite a few of them are working with us on transitioning to Ascent. And then there are customer who are brand new in all the regions in the same auto captive sector. In the banking, we have few deals in pipeline. Particularly in Australia and in Indonesia, I think we look with interest, see how they pan out in coming months. Couple of them are also in the European market.

(Operator Instructions) Our next question comes from the line of Shabu Qureshi with EMP.

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

Yes, Naeem is actually on a meeting in Germany, so he could not be in the call today. So let me give it a best shot, Shabu. Look, first of all, if you focus on APAC market, which is again our biggest market in terms of so many countries we support for so many years, we have a enough location to support every customer possible, whether they're new customer or the existing customer. China is a very big set up; in Beijing, a very big set up, we have 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 will go live. And then, of course, our bigger contract, which is Daimler Benz, as you all know, is also on track. So we maintain very well given the scale of people we have in all these offices. As you go to Australia and other markets, Indonesia, we have local team in place. Some, they fly from Lahore; some, they are based in the local offices. And if you go to U.K., we have a solid team. We just built a small new office in London, which is focused on Ascent-related business activities. And same thing, we have a small team in the U.S. operation because, of course, so far we are pushing very hard to win some Ascent deal, but there's ample team both in the front line and also in the back office in Lahore. So we have pretty good shipment in the field and our capability to support all the implementation, the time frame that we agreed with the customers.

Najeeb, can I just add to that?

Go ahead, Jeff, please?

This is Jeff Bilbrey, Shabu. I think another thing that's important to realize here is that, this is further proof that the Ascent platform is a good improvement technology. Whereas, we see some of our peers in the industry going to a new country and it might take 3 to 5 years and sometimes they even fail before they get live. We are literally going into new countries, just about every quarter it seems, 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 the testament to the development team in Lahore.

Our next question comes from the line of Michael Vermut with Newland.

Najeeb, excellent quarter out there. Question for you. Can you 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., moving -- getting some wins domestically?

Yes, I think, I'll focus on China and some region in APAC, and let Jeff come in and talk about U.S. Look, we have -- the fact that we're going live in China for the Daimler contract within next 2 months, there will be a -- it will be one of the biggest event in the company because there is a very large implementation and high volume. So -- and biggest in terms of value that is 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 look for references of the big customers and going lives on time frame and then customers happy with the new system. So that to me is a single one reason for us to generate more revenue, bigger pipeline, but also shows that our company has enough capability and maturity in the last 20 years that we can take on bigger projects, bigger name customer, bigger markets. So -- 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, the biggest concentration, but there are other countries also within the whole region that is really ready for the new deals. U.K., we started to do some different traction in the last few months. We signed one more deal I mentioned in the prepared remarks, but definitely we're seeing some interest in the Ascent and our sales team is very active in different conferences and meeting with lot of new customers, both in the auto sector, and, of course, in the banking. But in U.S., there's lot of efforts, and I think, the pipeline could not be more healthier. And I think I'll let Jeff take a stab on this thing. Jeff, go ahead, please.

Yes, sure. Thanks, Najeeb. Hi, Mike. Good morning. 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 reasonably 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, our top-level sponsorship, which is a massive, frankly, year-long branding exercise for NetSol in this marketplace to just gain more traction. So we do continue to work here. We do see some opportunities from the global clientele, as well as Najeeb mentioned, just even the local pipeline potential opportunities 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 e-mailing 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.