NetSol Technologies Inc (NTWK) 2022 Q1 法說會逐字稿

Good afternoon, and welcome to NETSOL Technologies Fiscal First Quarter 2022 Earnings Conference Call. On the call today are Najeeb Ghauri, Chairman and Chief Executive Officer; Naeem Ghauri, President; and OTOZ CEO; Roger Almond, Chief Financial Officer; 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 afternoon, 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 their most comparable GAAP measures. Additionally, the company has posted a presentation to accompany the remarks we plan to make on today's call in the Investors section of our corporate website.

Finally, I would like to remind everyone that this call will be recorded and made available for replay at www.netsoltech.com and via link available in today's press release.

Now I would like to turn the call over to Najeeb. Najeeb?

Thank you, Patti, and good afternoon, everyone. In the first quarter, we capitalized on the strong momentum built over the course of the past year and are firmly positioned to achieve our growth goals for fiscal 2022. Within our core business, the pipeline and mix of opportunities remain 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.

Within our more venture-based operations, the rollout for the OTOZ digital platform in partnership with MINI Anywhere has been a resounding early success with 10 dealerships subscribed and additional states going online in the near future, we are encouraged by the initial response and total opportunity.

Across the company, we have begun a deliberate process to conservatively begin returning our employees to our global offices. In the coming months, we are expecting to have 40% to 50% of our employees back in our Lahore campus or technology campus, which is home to the majority of our workforce and is at the heart of our technology and operations.

Moreover, since the start of the fiscal year, we have increased our headcount by over 30 employees, mostly stationed in Lahore to support additional implementation work and innovation initiatives. We have also made several strategic hires across our global operations to support our increased sales efforts.

We intend to make this year a return to meaningful growth, and we are confident that the investments we'll be making in our leadership, workforce, technology and expanded sales efforts will lead to outsized returns in the coming quarters.

With that 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 first quarter 2022 results for the period ended September 30, our total net revenues for the first quarter of 2022 were $13.4 million compared with $12.6 million in the prior year period. The increase in total net revenues was primarily driven by an increase in subscription and support revenues of $1.1 million, slightly offset by a decrease in total services revenue of $292,000.

Total subscription and support revenues in Q1 were $6.2 million compared to $5.2 million in the prior year period. The increase in total subscription and support revenues for the quarter was a result of several customers who went live with our product in fiscal 2021. We anticipate subscription and support revenue to gradually increase as we implement both our NFS legacy product and NFS Ascent. Total services revenue for the quarter was $7.2 million compared to $7.5 million in the prior year period. The decrease in services revenue for the quarter was a result of services being decreased for completed implementations which was offset by an increase in service revenue for an ongoing customer implementation in China.

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 million for the first quarter, an increase of $1.7 million from $6.3 million for the first quarter of 2021. The increase in cost of sales for the quarter were primarily due to increases in salaries and consultant fees of $1.1 million, travel cost of $110,000, depreciation of $58,000, and other costs of $407,000.

Gross profit for the first quarter of fiscal 2022 was $5.4 million or 40.6% of net revenues compared to $6.4 million or 50.5% of net revenues in the first quarter of fiscal 2021. The decrease in gross profit for the quarter was primarily due to increases in cost of revenue of $1.7 million offset by $773,000 increase in revenue.

Operating expenses for the first quarter increased 13.8% to $6.1 million or 45.3% of sales from $5.3 million or 42.3% of sales in the same period last year. The increase in operating expenses for the quarter was primarily due to increases in general and administrative and research and development costs.

Turning to our profitability metrics. Our net loss from operations was $640,000 for the first quarter, a decrease from net income from operations of $1 million in Q1 last year. Our GAAP net income attributable to NETSOL for the first quarter of fiscal 2022 totaled $188,000 or $0.02 per diluted share. This compares with GAAP net income of $718,000 or $0.06 per diluted share in the first quarter of last year.

The decrease in GAAP net income attributable to NETSOL for the quarter was primarily a result of cost to support revenues increasing at a greater rate than increases in revenues. As I mentioned on previous calls, it's important to point out that included in our net income this quarter was a gain of $1.3 million on foreign currency exchange transactions compared to a gain of $296,000 in Q1 of last year.

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 has an effect of increasing our revenues, but it also increases our expenses denominated in currencies other than the U.S. dollar.

Similarly, as the U.S. dollar gained strained 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. We plan our business accordingly by developing additional resources to areas of expansion while continuing to monitor our overall expenditures, given the economic uncertainties of our target markets.

Moving to our non-GAAP metrics. Our non-GAAP adjusted EBITDA for the first quarter of fiscal 2022 totaled $770,000 or $0.07 per diluted share compared with non-GAAP adjusted EBITDA of $1.6 million or $0.14 per diluted share in the first quarter of last year.

Please see the reconciliation schedules contained in our earnings release for our revised calculations of adjusted EBITDA for the fiscal quarter ended September 30, 2021. Turning to our balance sheet. At the quarter end, we had cash and cash equivalents of approximately $27 million or approximately $2.40 per diluted common share which was down from $33.7 million or approximately $2.93 per diluted common share at June 30, 2021.

On July 30, 2020, NETSOL's Board of Directors approved a stock repurchase program that authorized potential repurchases of up to 2 million of its common stock over a 6-month period. All shares permitted to be purchased under the July 2020 plan were purchased during the plan's original date and prior to the conclusion of the extension of the plan.

On May 21, 2021, the Board of Directors authorized an additional repurchase plan of up to 2 million worth of shares of common stock through November 20, 2021. Under the program, the company may repurchase its common stock in the open market from time to time in amounts, at prices and at such times as the company deemed appropriate subject to market conditions and federal and state laws governing such transactions.

NETSOL expects to fund the repurchase with its existing cash balance and cash generated from operations. As of September 30, 2021, the company had repurchased 691,528 shares of its common stock at an aggregate value of $2,464,887.

One final note before I hand the call back over to Najeeb is regarding our financial outlook for fiscal year ending June 30, 2022. The company expects total revenues to increase by at least 10% and subscription and support or recurring revenues to increase by at least 20%. The company's guidance is based on existing contracts and recurring revenue from its current customer base, performance results tracked through October of 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 updates. Najeeb?

Thank you, Roger. I'll now provide updates within the major components of our growth strategy. Our strong financial performance during the regular quarter -- this quarter was highlighted by an increase in recurring revenues of 10% sequentially and 20% over the prior year, respectively. At an annualized rate, this quarter's performance equates to a nearly $25 million annualized run rate, which we expect to improve throughout the balance of the year.

As we conservatively begin the process of welcoming our employees back to work across our global footprint, we expect a return to sales growth with a related increase in expenses to support our increased business activity. Our cash position remains strong, providing additional resources to support our core business as well as strategic investment in high-return, long-term opportunities, including our work in the OTOZ Innovation Lab. With these factors in consideration, as Roger just noted, we are reiterating our full year revenue outlook of 10% top line growth and 20% subscription growth revenue throughout the balance of the year.

Moving on to the second component of our strategy. We are innovating in new areas and looking to create partnerships through technology and personnel, which can be a major benefit to our other organization as well as our own. 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 months has undoubtedly been our partnership with MINI Anywhere. As a reminder, OTOZ has been working with BMW Group Financial Services through its key brand, MINI Anywhere to provide MINI USA customers with a fully digital shopping experience, empowering their marketing strategy and creating a new automated sales channel for dealerships and lenders.

The OTOZ Digital Retail platform for MINI Anywhere has recently been featured across major publications, including Music, Automotive News and ABC News. Since launch in late May, the new platform has quickly gained traction. As of year end -- quarter end, MINI Anywhere was live with 8 MINI dealerships and as of October, we've grown to the #2 chain, including onboarding of 2 of the biggest dealer groups in the U.S. In just a few short months, we have now captured 50% of all California MINI dealership, and we're looking to build on this early momentum going forward.

In the coming months, we are expecting enrollments from dealers in both Florida and Texas with several other states following suite. The success of this program can be attributed to several factors, but I'd like to share 1 data point we believe to be the most telling. Through the fiscal first quarter, we have been able to generate a blended lead conversion ratio approximately 1:6, meaning for every 6 opportunities we identify through our platform, 1 of those leases will convert to a vehicle sale. This performance, in light of the global and world document 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 products 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. In the coming months, we are also anticipating the launch of a second OEM digital retail program and are in early engagement with several new Tier 1 OEMs on potential partnerships. To address the strong interest we are seeing, we have expanded our sales and partner success team to expand our sales funnel and ensure ongoing success to our growing list of dealer partners.

The final component of our strategy is exploring inorganic opportunities where it makes sense. On this note, I can share that we are continuing to evaluate opportunities in the marketplace that are highly accretive and complementary to our business. With this overview completed, I will now get into our operational updates for the quarter. Starting with APAC. And with the previously announced 12-country $110 million contract with Daimler Financial Services, we are continuing to make considerable progress along our multi-year, multi-country implementation road map. In August, we officially went live with the CMS module in New Zealand and more recently, we've begun the implementation process in India, which we expect to go live early in calendar 2022.

To date, we are live in 10 of the 12 countries, except in India and Taiwan and are making progress on the remaining deliverables in accordance with our customer time lines. In August, we soft launched our NFS Ascent digital product with new -- with one of the subsidiaries of a Japanese equipment finance company in New Zealand, this multimillion-dollar contract or project is currently under transition into maintenance. Finally, our recent announced multi-year, multi-million dollar upgrade with a Global Automotive Financial Service company or GAFS in China continues to move forward. Based on additional implementation and consideration, we are currently anticipating the fall 2023 go-live.

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're seeing in our largest core market and believe the ongoing recovery in this region to be (inaudible) of a larger return to work across our global operations.

Moving next to our European operations or NTE. Europe and North America remain exciting new growth areas of NETSOL. We are strategically marketing our cloud and SaaS-based offerings, specifically in these regions, which are contributing to the growing subscription and support revenues noted earlier. We have several opportunities in Europe specifically that are making their way through the life sales cycle. While we can't control when some of these deals get signed, we believe our current moment, combined with the critical mass of potential deals bodes well for some future wins in the coming months.

We also made several key strategic hires to support our growth goals in the region. Of note, financial services industries veteran, Mark Cawood will take -- will be taking over as a Managing Director of Virtual Leasing Services, our wholly owned portfolio and Risk Management Company in the U.K. Mark brings a proven record of creating and executing data-driven marketing and product development initiatives in fintech and financial services industries, resulting in the delivery of significant business growth and diversification of revenue stream. VLS has long been a core component of our European region, and we are looking forward to seeing Mark take the business to new heights.

And recently, we also mentioned an expansion of our strategic partnership with leading IT and business consulting service from CGI to offer our next-generation NFS Ascent platform supported by CGI's local business consulting, IT integration and managed service solution. CGI and NETSOL initially formed an ally in 2019 to help NETSOL deliver their first end-to-end cloud managed service for Ascent platform for the United Kingdom based automotive wholesaler.

CGI has long-standing relationship with leading financial services provider in Europe based on in-depth industry knowledge, independent advice and a consistent delivery track record. Partnering with a global IT service provider like CGI enables us to provide our customers with leading industry and application-specific IT solutions.

This important and expanded partnership will be most impactful to our joint customers in the commercial, finance and leasing sectors. With CGI's expertise, we expect to accelerate and maximize the value proposition from IT investments and deliver the results our customers need to streamline and grow their businesses.

Now finishing with our North America operations or NDA, last quarter, we announced the first official sales of NFS Ascent in the U.S. market, an agreement with Motorcycle Group to deploy the cloud-based version of our flagship platform across the entire operations, including our only point of sale and contract management system to support retail lending and leasing. Motorcycle Group consisting of motor lease and motor loan presents these loan offers and loan offers simultaneously to qualified applicant so that motorcycle and power sports dealers can maximize the sales and enable customers to prequalify and select their vehicle through Motorcycle Group's advisers.

The project implementation began in July with an expected go-live into 2022. Going forward, we'll be looking to leverage the breakthrough agreement to prospective clients throughout the North America market. Our current pipeline of opportunity in the region remains the greatest near-term growth opportunity for our business, which is why getting the first new logo signs and implementation under our belt are so important.

In summary, we had a strong start to the year. We are seeing healthy recovery in 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) There are no questions in queue at this time. At this time, this concludes our question-and-answer session. If your questions were not addressed during the Q&A, please contact NETSOL's Investor Relations team by e-mailing them at investors@netsoltech.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 all of our investors for their continued support, our loyal customers and our dedicated employees for their ongoing contribution. We look forward to updating you on our next call. Thank you.

Thank you for joining us today for NETSOL's Fiscal First Quarter 2021 Earnings Call. You may now disconnect.

Thank you, operator. Thank you, everyone.