NetSol Technologies Inc (NTWK) 2021 Q1 法說會逐字稿

Good morning, and welcome to NetSol Technologies Fiscal First Quarter 2021 Earnings Conference Call. On the call today are Naeem Ghauri, CEO of OTOZ; Roger Almond, Chief Financial Officer; Patti McGlasson, General Counsel; and Asad Ghauri, Global Head of Sales. I would now like to turn this call over to Ms. 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 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 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 the 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 Naeem. Naeem?

Thank you, Patti. Good morning, everyone. Unfortunately, Najeeb Ghauri, our Chairman and CEO, was under the weather and couldn't make the call. We wish him a quick recovery.

The beginning of the fiscal year was an extension of the same business conditions we have witnessed since the pandemic took hold. But we are continuing to operate efficiently, control costs and execute on our long-term strategic growth plan.

In fiscal Q1, we saw year-over-year improvements to our gross profits, operating income and earnings per share, which were collectively driven by our conservative cost management and expense reduction efforts over the past few months. Additionally, we now have more cash than any point in our history of our company, cash on hand provides us with flexibility and security, both of which are paramount in any environment, but especially so today. We will continue to think and operate like owners emphasizing cash flow as much as top line.

During the period, cash flow from operations reached $4.7 million, the best cash flow generation quarter we've had since June of 2019. While the overall sales environment continues to be challenging, we are witnessing encouraging signs that have us optimistic about the remainder of the year.

Operationally, our teams have been hard at work, meeting project implementation deadlines leading to a few significant Go-Live events during the quarter. Most recently, we successfully implemented our NFS Ascent retail platform, including our loan origination system and contract management system for a Tier 1 German auto captive finance company in China, which was the second and final phase of our previously announced $30 million contract.

We've also seen very encouraging early traction from our North American and European operations referred to as NTA and NTE, respectively. This quarter, we went live with our first cloud NFS Ascent North American customer, SCI Lease Corp. in Canada. As of today, NTA and NTE combined represent essentially the same size pipeline of contract opportunities compared to APAC, which has historically commanded the lion's share of our revenues. For the rest of today's discussion, I will provide a high level recap of the past quarter and more recent updates before spending the rest of our discussion on our current market outlook through the lens of our 3-pronged growth strategy. But prior to that, I'll hand over the call to CFO, Roger Almond, who will walk us through the financial results of the quarter. Roger?

Thanks, Naeem. Turning to our fiscal first quarter 2021 financial results for the period ended September 30, our total net revenues for the first quarter were $12.6 million compared to $13.6 million in the prior year period. The decrease in total net revenues was primarily due to a decrease in total license fees of $2.5 million, which was offset by an increase in subscription and support revenues of $565,000 and an increase in total service revenues of $970,000.

Total license fees in Q1 were 3,500 compared to $2.5 million in the prior year period. The decrease in license fees was primarily due to the absence of meaningful contribution from our country $110 million contract as well as other contracts to implement our NFS Ascent platform which had a more pronounced contribution in the prior year period. Subscription and support revenues are now included as a separate revenue line item in place of what was formally referred to as maintenance revenues. In addition to traditional maintenance revenues from post contract customer support, this metric also includes subscription revenue from our Software-as-a-Service or SaaS offerings, including the cloud-based version of our flagship and Ascent platform.

Subscription and support fees are recurring in nature, and we anticipate these fees to gradually increase as we implement both our NFS, legacy products and NFS Ascent.

As we continue to grow recurring revenue over time, we believe this new category will become a more impactful portion of our business as well as a better way to judge our overall performance.

Results for the prior year period have been adjusted to make performance comparable on a year-over-year basis.

Total subscription and support fees in Q1 were $5.2 million compared to $4.6 million in the prior year period. The increase in subscription and support revenues was due to the start of new agreements from customers who went live with our product this quarter as well as ongoing recurring revenue derived from prior sales of our subscription-based offerings.

Our total services revenue for the quarter were $7.5 million compared to $6.5 million in the prior year period. The increase in total services revenue for the year was primarily due to an increase in revenues associated with new implementations and change requests. Services revenues 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 $6.3 million for the first quarter, a decrease of $1.2 million from $7.5 million in the first quarter of 2020. The decrease in cost of revenues for the year was predominantly driven by a decrease in travel expenses.

Gross profit for the first quarter of fiscal 2021 was $6.4 million or 50.5% of net revenues compared to $6.1 million or 45% of net revenues in the first quarter of fiscal 2020. The increase in gross profit was primarily due to a greater rate of decrease in total cost of revenues compared to the related total net revenues. Operating expenses for the first quarter decreased 18.2% to $5.3 million or 42.3% of net revenues from $6.5 million or 48.2% of net revenues in the same period -- of the same period last year.

The decrease in operating expenses was primarily due to decreases in selling and marketing, professional services, research and development and general and administrative expenses which were offset by a minor increase in depreciation and amortization.

Turning to our profitability metrics. Our income from operations was $1 million for the first quarter, an increase from a net loss from operations of $427,000 in Q1 last year. Our GAAP net income attributable to NetSol for the first quarter of fiscal 2021 totaled $718,000 or $0.06 per diluted share. This compares with a GAAP net loss of $1.8 million or $0.16 per diluted share in the first quarter of last year. The increase in GAAP net income attributable to NetSol was primarily due to the decrease in cost of revenues previously mentioned at a greater rate than related decrease in total net revenues as well as a significant decrease in total operating expenses.

As I mentioned on previous calls, it's important to point out that included in our net income this quarter was a gain of $296,000 on foreign currency exchange transactions compared to a loss of $1.8 million 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. The 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 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 first quarter of fiscal 2021 totaled $1.6 million or $0.14 per diluted share compared with a non-GAAP adjusted EBITDA loss of $1.1 million or $0.09 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 first quarter ended September 30, 2020.

Turning to our balance sheet. At quarter end, we had cash and cash equivalents of approximately $24.9 million or approximately $2.11 per diluted common share, which was up from $20.2 million or approximately $1.71 per diluted common share at June 30, 2020.

In June 2016, the FASB issued ASU 2016-13, which introduced a new forward-looking approach based on expected losses to estimate credit losses on certain types of financial instruments, including trade receivables, contract assets and held to debt -- held-to-maturity debt securities, which requires a company to incorporate considerations of historical information, current information and reasonable and supportable forecasts. ASU 2016-13 also expands disclosure requirements. As a result, we were required to review our financial assets at June 30, 2020 under the criteria and record any adjustments through equity. Based on the results of our evaluation, we incurred a onetime cumulative effect adjustment to retained earnings of $6.8 million, increasing our allowance for credit losses related to certain convertible notes receivable, interest receivable, accounts receivable, revenue in excess of billings and other receivables.

The onetime noncash $6.8 million provision equates to a 100% allowance for various financings in connection with the company's investment in WRLD3D. The company may still realize returns to its various investments in WRLD3D going forward. In that event, we would record those returns in subsequent reporting periods. One final note before I hand the call back over Naeem. 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 subsequent 5-month period ending on December 24, 2020. The planned repurchase program will also be subject to an additional 6-month extension at the discretion of management.

During the fiscal first quarter, the company purchased 147,052 shares at an average price of $3.16 per share. Subsequent to the quarter end, the company purchased an additional 102,023 shares at an average price of $2.94 per share. In total, the company has purchased 249,075 shares at an average price of $3.07 per share. 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 we deem appropriate, subject to market conditions in federal and state laws governing such transactions.

NetSol expects to fund the repurchase with its existing cash balance and cash generated from our operations. That concludes my prepared remarks. I'll now turn the call back over to Naeem. Naeem?

Thank you, Roger. As I mentioned in my opening remarks, with many cohort driven purchasing delays beginning to move forward and with several catalysts on the horizon, we are optimistic about our prospects for the new fiscal year. Furthermore, our recent expansion further into Europe and North America is beginning to pay dividends through our steadily improving recurring revenue performance.

As Roger noted a moment ago, we're now reporting subscription and support revenues as a proxy for total recurring revenues. As we layer on maintenance fees through larger traditional enterprise contracts and increase our SaaS-based footprint, we expect to build this base over time, which provides more predictable revenues with a more attractive margin profile. In fiscal Q1, we grew these revenues 13% year-over-year to $5.2 million. On an annualized basis, that equates to over -- to well over $20 million in pure recurring revenue for this fiscal year, not including benefits from pending agreements or Go-Live events scheduled for this year.

At this point, I will be recapping some of the major highlights from the period within our 3 major operating regions, respectively. Now with that overview finish, I'll get some updates from our main operating regions.

Starting in APAC with the previously announced 12 country $110 million contract with the German auto manufacturing giant, Daimler Financial Services, we continue to make considerable progress along our multiyear, multi-country implementation road map. This quarter, we have successful Go-Live events in both Singapore and Thailand, which were all the more impressive due to the remote work and international travel constraints we've had to work past. Today, we have now gone live in some within 10 of the 12 countries and are continuing to work through the remaining deliverables according to our customers' time line.

In the near term, the most immediate Go-Live events will be additional modules within already live countries, including New Zealand and Australia. We will continue to provide updates as we make further progress.

Perhaps the most notable implementation over the past few months was our launch of the NFS Ascent retail platform for BMW Financial Services in China. This deployment is a second phase of a previously announced $30 million contract in which NetSol was selected as the vendor of choice after an extensive evaluation process.

I am very proud of NetSol's development and implementation teams as a world-class center of excellence as a whole, where we -- who are forced to switch to a purely remote work environment in the middle of this project. After 2 years of dedication and continual hard work, amid a challenging COVID-19 environment, we successfully implemented both the full wholesale and retail suites of our NFS Ascent platform.

This deployment with a brand name like BMW is a big ticket project for NetSol, another major step forward for our operations in the new fiscal year. Importantly, with this major implementation completed, we have been able to allocate additional resources to a number of other upcoming launches we have planned in the coming months.

One final note within APAC. Over the past few months, we have been working with a leading auto retailer in New Zealand, who voluntarily put their NFS Ascent retail system implementation on hold earlier this year due to COVID concerns. I am pleased to report that the project has now been resumed, we expect to Go-Live at the end of the calendar year.

Moving to our European operations, or NTE. We have made mention of many times before and already in this call, a big push in this region as well as NTA has been our cloud-based offerings. Late in 2019, NetSol announced the introduction of a new subscription-based pricing option for all its cloud-based products and services, which is meant to work as a substitute, but not a replacement to the traditional license model.

Along with other value-based factors built into the model, the new pricing plans intended to decrease initial buying costs for new customers and provide an alternative to current customers seeking lower software usage and maintenance costs. Subscription-based pricing is being offered on a monthly, quarterly or annual basis.

Europe and North America are major areas of focus for us, and we believe this new more flexible pricing option will be a great way for us to expand our initial footprint. As our customers realize the benefits from subscription pricing, we continue to see further traction and demand for our products.

In April, we signed a contract with a leading bank in the U.K. for a cloud implementation as Ascent retail platform, which included our POS solution and CMS. After months of collaborative work, we're now working on a soft launch with a full-scale Go-Live planned for early next year. In July of 2019, we signed a multimillion-dollar contract with a large U.K. vehicle finance company to implement our NFS Ascent wholesale platform. Like many of the implementations I have discussed today, our time line has been pushed out due to COVID related impacts to our customers' business, but we are still making progress on our implementation and expect to go live early next year.

Moving on to North American operations or NTA. As part of our North American expansion efforts, in August, we appointed Peter Minshall as our new EVP of NTA. We are really excited to have Peter come on board. He brings over 3 decades of international experience in the financial service industry with an accomplished background at a major blue-chip enterprise with specific sector expertise in the auto finance space.

Prior to joining NetSol, Peter held various senior leadership roles with Daimler Financial Services, and most recently, serving as Director of Operations for Daimler Africa and Asia Pacific division, where he managed leasing and finance operations for a team of 250 across 11 different markets. In the short-term that he's been with us, Peter has already been a tremendous boost to our operations, and we're looking forward to seeing where he can take NTA over the next several years.

Moving to sales. In August, we announced a successful Go-Live with our NFS Ascent offering, marking the first official Go-Live for Ascent in North America. The implementation was performed for SCI Leasing Corp., a Canadian-based national automotive leasing company and also represented the first cloud and SaaS-based agreement for Ascent in this region. The deployment was achieved in a record 8 months in a largely remote work environment, which is a testament to the work of our teams as well as the flexibility we now have in a cloud-based deployment.

What these initial sales have shown us is that the market for subscription-based services is real and growing. The flexibility in this allows from a more diverse set of customers to access our products, effectively opening up a new market segment that will help to smooth out our existing enterprise sales business.

I'll now provide some brief updates on our progress within our 3-pronged growth strategy. As a reminder, these are the 3 key areas where NetSol is focusing, where, we believe, we can generate outsized results and propel our business to its next phase of growth.

First, continued focus on the growth -- organic growth of our current core business; second, innovating in new areas and looking to create partnerships where technology and personnel can be a major benefit to other organizations as well as our own; and third, exploring inorganic growth opportunities where it makes sense.

Beginning with the core business, as I mentioned earlier, we are continuing to operate efficiently control costs and execute on our long-term growth plan. During fiscal Q1, we were very active on the implementation front and had multiple successful Go-Live events within our APAC region for major international auto manufacturers. We are also gaining traction with midsized auto captives in the North American and European markets with the latter comprising a greater proportion of our overall revenues compared to last year.

Financially, we generated roughly $1.3 million from change requests and reduced expenses by nearly 20%, leading to sustained profitability on a trailing 12-month basis.

We also grew our recurring revenue base by double digits to $5.2 million. All told, we are confident that the market is beginning to pick up in all global regions and sales discussions with a number of potential customers remain active. We have a number of high-value, near-term opportunities in our pipeline and are cautiously optimistic about our growth outlook.

Moving on to innovation and partnerships. Beginning with OTOZ, which has been super busy over the past few months. For those of you less familiar, OTOZ is a NetSol subsidiary and a digital platform that helps auto manufacturers, auto captives, fleet owners and start-ups to launch orchestrate and scale mobility businesses.

The OTOZ platform is built on a cutting-edge technology stack, which comprises of cloud-native architecture, micro services, AI, machine learning, blockchain, software development and IT operations and APIs. OTOZ has positioned itself firmly in this quickly evolving space as a white label technology platform that enables mobility operators to deploy fast, out-of-the-box, fully cloud-native solutions without the need for heavy upfront licensing and customizing investments. It is sold as a SaaS product that facilitates companies of any size to business with rapid deployment and low upfront cost.

We have now entered in mature sales opportunities with a number of Tier 1 organizations that are evaluating the OTOZ platform, which has already been live with our first client and partner Drivemate in Thailand since June of 2020. We are also currently partnering to launch a digital automotive retail platform for U.S.-based subsidiary of a renowned German auto manufacturer for one of its key brands.

Once deployed, the end product will be rolled out to hundreds of auto dealers across the U.S. and expect it to generate significant SaaS revenue for our business.

This is a major breakthrough for OTOZ. And within the first year of this agreement, we would be receiving up to $1 million in pure recurring revenue. Obviously, this is a very exciting time for the OTOZ team and we're looking forward to making a more formal announcement soon.

With that overview of OTOZ completed, I will now discuss our remaining growth areas as well as provide a brief outlook for our business.

On strategic partnerships. While I can't share any specific details in that area on today's call, what I can say is currently is that we are working with some of our existing large customers in an effort to align strategically for mobility related offerings. And for our third and final growth area, we are continuing to evaluate opportunities in the marketplace that make sense in being highly accretive and complementary to our business. More updates will follow.

Looking ahead, we have an encouraging pipeline of opportunities that should support our plans for incrementally improving -- incrementally improved performance this year. We are incredibly appreciative of the efforts from our global teams who continue to perform at an exceptional level even in the face of technological and logistical challenges. And with that, we can now open the call for questions. Operator?

(Operator Instructions) I would now like to turn this call back over to Mr. Naeem Ghauri for closing remarks.

Well, thank you very much for listening in today. I especially want to thank our investors for their continued support, our loyal customers and our dedicated employees for their ongoing contributions. And we look forward to updating you on our next call. Thank you. Operator?

Thank you for joining us today for next NetSol's First Quarter 2021 Earnings Conference Call. You may disconnect your lines at this time. Thank you for your participation.