NetSol Technologies Inc (NTWK) 2022 Q4 法說會逐字稿

Good morning, and welcome to NETSOL Technologies Fiscal Fourth Quarter and Full Year 2022 Earnings Conference Call. On the call today are Najeeb Ghauri, Chairman and Chief Executive Officer; 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 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. 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 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 the 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. Today, I'm calling in from the NETSOL campus, or technology campus in Lahore Pakistan. I'm very pleased to state that the operations have returned to a normalcy in the current post-pandemic era, including a broader return to work and increased opportunities to meet face-to-face with current and prospective clients.

Undoubtedly, during the past 2.5 fiscal years, from the later half of 2020 through fiscal 2022, NETSOL faced the same micro and macroeconomic challenges as the rest of the world. NETSOL is not immune to the adverse impact of this game-changing experience with our global employees, our customers and our shareholders. Happily we are seeing a sea change as business moves back to normal.

Following the removal of localized restrictions, we were able to implement a back-to-office working environment in every global location, including our technology delivery center in Lahore, Pakistan. The return-to-the-office has been positively received by our global employees. While we choose to emphasize our pleasure with this return to normalcy, we should note that our ability and capability to support our deliveries to our customers was never impacted by remote work.

The return to normalcy has allowed key sales and delivery teams to travel to North America, Europe and the majority of the Asia Pacific region, this travel has enabled our teams to connect with current and potential customers increasing the ability to meaningfully compete for new global opportunities.

While most of Asia Pacific has resumed full opening, China continues to enforce stringent quarantine rules. The Chinese requirement that all the visitors quarantine for at least 7 days has impacted our ability to meet face-to-face with the C-level executives and key decision makers of potential new and existing Chinese customers. Nonetheless, our local Chinese team has continued to build new relationships and remain connected with customers in our largest revenue market, while our global sales, delivery and senior executive teams continue to use alternate meeting tools to engage virtually.

This is all to achieve best outcomes. Analyzing revenue growth, we have seen modestly steady growth in the first few months of the new fiscal year, while the last half of fiscal year 2022 fell short of our expectations, full year revenue growth. This was due to delays in expected new revenue in the second half of fiscal year 2022 that was pushed back to this current fiscal year 2023. However, a big positive is that annual recurring revenue or ARR increased to almost 28% from a 20% expectation a while, while our top line grew by 4.2%.

One of the key dynamics facing businesses worldwide was a run-up of overall operating expenses during the following -- during and following the strictest time of the pandemic era. High inflation is not only the U.S. but globally has increased cost on everything from salaries, travel, utilities and general operating expenses.

Our salaries and G&A increased mostly due to the hiring of over 330 employees in Pakistan, China, the U.K. and U.S. and the impact of cost of living increases from most employees, except the senior management. Generally speaking, hiring more employees is to position NETSOL for aggressive growth in North America, China and Europe.

Additional resources were required to support new verticals, investing in our new AWS professional services and bidding for high-value contract for our flagship Ascent offering in the U.S. and Canada, all supporting the growth we see in the leasing and finance sector, mobility and other new areas you just mentioned. I'll now turn the call over to Roger Almond for an overview of the financials. Roger?

Thanks, Najeeb. Turning to our fiscal fourth quarter and full year 2022 financial results for the period ended June 30, our total net revenues for the fourth quarter of fiscal 2022 were $13.5 million compared with $15.4 million in the prior year period. The decrease in total net revenues was primarily driven by a decrease in total license fees of $587,000, a decrease in services of $1.8 million, offset by an increase in subscription and support revenue of $523,000.

For all of fiscal 2022, total net revenues were $57.3 million compared to $54.9 million in fiscal 2021. The increase in total net revenues was primarily due to an increase in subscription and support revenues of $6.1 million offset by a decrease in license revenues of $1.7 million and a decrease in services revenue of $2.1 million.

Total license fees in Q4 were $952,000 compared to $1.5 million in the prior year period. For the full year, total license fees were $4.5 million compared to $6.2 million in fiscal 2021. The decrease in license fees for both the quarter and year was primarily due to the decrease in revenue being recognized from contracts to implement our NFS Ascent retail platform.

Total subscription and support revenues in Q4 were $6.1 million compared to $5.6 million in the prior year period. For the year, total subscription and support revenues were $28.3 million compared to $22.2 million in the prior fiscal year. The increase in total subscription and support revenues for the year was primarily due to the recording of approximately $3.5 million as a onetime cumulative catch-up due to an amendment to our 10-year contract with Daimler Financial Services and other customers going live with our product.

Moving forward, 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 were $6.5 million compared to $8.2 million in the prior year period.

For the full year, total services revenue were $24.4 million compared to $26.4 million in the prior fiscal year. The decrease in services revenue for the quarter and the year was a result of reduced implementation services for DFS and BMW as they go live with our product. 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 $8.7 million for the fourth quarter, an increase of $863,000 from $7.9 million in the fourth quarter 2021. For fiscal year 2022, cost of revenues was $33.5 million, an increase from $28.6 million in fiscal 2021. The increase in cost of sales for the quarter were primarily due to increases in salaries and consultant fees of $671,000 and other costs of $256,000.

The increase in cost of sales for the year were primarily due to increases in salaries and consultant fees of $3.6 million, travel expenses of $373,000 and other costs of $1.1 million. Gross profit for the fourth quarter of fiscal 2022 was $4.8 million or 35.6% of net revenues compared to $7.5 million or 48.8% of net revenues in the fourth quarter of fiscal 2021.

Gross profit for fiscal 2022 decreased to $23.7 million or 41.5% of net revenues compared with $26.4 million or 48% of net revenues in fiscal 2021. The decrease in gross profit for the quarter was primarily due to a decrease in net revenues of $1.8 million and increase in cost of sales of $863,000.

The decrease in gross profit for the year was primarily due to an increase in cost of sales of $4.9 million, offset by an increase in revenues of $2.3 million. Operating expenses for the fourth quarter remained flat at $6.4 million for Q4 of fiscal year 2022 and 2021. However, as percentage of sales increased from 41.4% for Q4 fiscal year 2021 to 47% for the current quarter.

Operating expenses for fiscal 2022 increased to $24.8 million or 43.4% of net revenues from $23.6 million or 43% of net revenues in fiscal 2021. The Q4 increase in operating expenses as a percentage of revenue was due to the decrease in revenue in Q4 of 2022 compared to our Q4 2021.

The increase in operating expenses for the year was primarily due to an increase in selling and marketing expenses of $665,000 and research and development costs of $668,000. Net loss from operations was $1.6 million for the fourth quarter compared to net income from operations of $1.1 million in Q4 last year. Net loss from operations for the full year was $1.1 million compared to net income from operations of $2.7 million for fiscal year 2021.

Other income and expenses include significant amounts for both the fourth quarter and the fiscal year ended June 30, 2022. For Q4 of 2022, we recognized a foreign currency exchange gain of $1.6 million compared to a gain of $918,000 for Q4 2021.

For the year ended June 30, 2022, we recognized a foreign currency exchange gain of $4.3 million compared to a loss of $597,000 for 2021. The increase in the recognized gain for both the quarter and the year was primarily due to the weakening of the Pakistan rupee compared to the U.S. dollar and the euro.

In Q4 2022, the share of net loss from equity investments was $1.7 million compared to a loss of $21,000 for Q4 2021. For the year ended June 30, 2022, the share of net loss from equity investment was $2 million compared to a loss of $254,000 for the year ended June 30, 2021. The increase for the quarter and the year is due to the impairment charge of $1.6 million that was recorded for the investments in World 3D and Drivemate. Our GAAP loss attributable to NETSOL for the fourth quarter of fiscal 2022 totaled $2.2 million or $0.19 per diluted share. This compares to GAAP net income of $1.9 million or $0.17 per diluted share in the fourth quarter of last year.

GAAP net loss attributable to NETSOL for fiscal 2022 totaled $851,000 or $0.08 per diluted share compared to net income of $1.8 million or $0.15 per diluted share for fiscal 2021. The decrease in GAAP net income attributable to NETSOL for both the quarter and year was primarily due to increases in the cost of goods sold.

Moving to our non-GAAP metrics. Our non-GAAP adjusted EBITDA for the fourth quarter of fiscal 2022 totaled a negative $1.4 million or negative $0.12 per diluted share compared with non-GAAP adjusted EBITDA of $2.9 million or $0.26 per diluted share in the fourth quarter of last year.

For the full fiscal year 2022, non-GAAP adjusted EBITDA totaled $1.8 million or $0.16 per diluted share compared with $5.4 million or $0.40 -- $0.47 per diluted share in fiscal 2021. Please see the reconciliation schedules contained in our earnings release for our revised calculations of adjusted EBITDA for the fiscal year ended June 30, 2022.

Turning to our balance sheet. At quarter end, we had cash and cash equivalents of approximately $24 million or approximately $2.13 per diluted common share, which was down from $33.7 million or approximately $2.93 per diluted common share at June 30, 2021. That concludes my prepared remarks. I'll now turn the call back over to Najeeb. Najeeb?

Thank you, Roger. From a high level, I'd like to outline the fundamental components of our growth strategy. First, after 2 years of top line decline, we grew by 4.2% in fiscal year 2022 as compared with fiscal year 2021. Second, we have continued to focus on organic growth within the core business. Subscription and support revenues reached $28.3 million for fiscal 2022, nearly 28% increase over the prior year, due in large part to a onetime catch-up of $3.5 million on Daimler contract, with a $24 million plus run rate of recurring subscription and support revenue projected over the coming 12 months with each new customer we signed, add to our recurring revenue, which drives both the top and the bottom line.

As we layer on post contract support 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.

Finally, we are cautiously optimistic about fiscal 2023 revenues as we have several high-value new opportunities for our flagship Ascent solution in discussion stages with a few North American-based Tier 1 captive finance companies. Let me provide a little more information on our geographic regions, starting with the U.S. and Canada.

We are establishing a few new verticals such as AWS certified partners and professional services. These are opening new growth area for us hopefully, resulting in a new revenue flow in the U.S. We have hired a few U.S. and Canada-based sales executives to build this segment.

We remain optimistic about the Ascent in North America after encouraging progress with multiple new major auto captive finance companies. Also, our MINI Anywhere adoption have grown to over 24 MINI dealerships in the U.S. as of June 30, 2022. There's approximately 6 more adoption since then, a very positive sign of our platform acceptance in the retail side.

This has provided a new market opportunity in the auto dealership segment from which we are expecting over $1 million new revenue in the U.S. in fiscal 2023. We are committed to and excited about the overall market opportunities in North America and NETSOL's core business offerings. These include Ascent, potential updates for our legacy product to Ascent as well as new implementations for our legacy products for new customers. To achieve this, we continue to invest in new local talent to broaden our sales and marketing efforts and to build strong business offering in North America and North American markets.

Overall, we remain committed to the U.S., which is the most attractive and big market for NETSOL with a record strong pipeline. In Europe, we have added a few new clients in the fourth quarter of fiscal 2022. A major and a very large European retail business we have completed the discovery phase and are proceeding with the implementation phase of this agreement from multiple countries.

Our European team is a very tightly run operation and we are participating in several new RFPs for our core offerings. The pipeline is healthy and encouraging and includes continued interest in the cloud version of Ascent. In the Asia Pacific region, our overall stability here has returned to most of our markets such as Thailand, Australia, New Zealand, Japan and others.

As mentioned earlier, China continues to experience global challenges, both COVID related and its economy overall. Despite these challenges, we are happy to report our clients appear to continue to be stable and actively engaged with NETSOL. Our newly established hyper localized Chinese team is positioned to unlock new and local Chinese markets in the auto and truck sectors.

The hurdle remains the 7-day quarantine period of visitors to China, necessarily restricting face-to-face meeting with senior management of new prospects. However, we are optimistic that the efforts of our President of our Chinese subsidiary, Ms. Amanda Li, will lead to better results during this and following fiscal years.

China remains our largest revenue region with very satisfied long-term clients, such as Daimler, BMW, Ford, Fiat, Volvo and GAC-Sofinco to name a few. Our core business and the underlying technology assets that drive it has not changed over has changed though are the underlying industry dynamics. We're finding new ways to future proof our business and adapt to a next division, digital strategy, and one of those is by accelerating our transition to the cloud.

We continue to note the automotive industry's significant push towards digital transformation in the retail space, marked by various announcements of newly formed from partnerships major acquisition and e-commerce pilots stakeholder their way in to meet the consumers' evolving expectations for online shopping options, including traditionally in-person big-ticket items.

In summary, we are welcoming to return to normalcy and have developed a comprehensive strategy globally to target high-value customers in key geographies and new formats. After the challenging few years, we are entering fiscal 2023 progress and a return to growth with a plan to get there. And that -- and with that, I'd like to open the call for questions. Operator?

(Operator Instructions)

I think we have given enough time. Mary, I think we can just end the call, right?

At this time, this concludes our question-and-answer session. If you have any other questions that were not addressed please contact NETSOL's Investor Relations team by e-mailing them at investors@netsoltech.com or by calling them at 818-222-9195. I'll now turn the floor back to Mr. Ghauri for any closing comments.

Thank you for joining us today. I especially want to thank our investors for their continued support and all customers and our dedicated employees for their ongoing contribution. We look forward to see you in the next call. Thank you, and good day.

Thank you. Thank you for joining us today for NETSOL's Fiscal Fourth Quarter and Full Year 2022 Earnings Call. You may now disconnect your lines.