NetSol Technologies Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
November 7, 2023

Key Takeaways

  • Positive Sentiment: NetSol reported Q1 revenues of $14.2 M, up 12% year-over-year, with gross margin improving to 43% from 33% last year.
  • Positive Sentiment: The company recognized $1.3 M in licensing revenues from Isuzu Motors and plans to sign additional deals for more consistent licensing income.
  • Positive Sentiment: Improved cost discipline drove operating expenses down to 41% of sales, boosting profitability and freeing capital for growth investment.
  • Positive Sentiment: NetSol is expanding into the U.S. with a new Austin office, evaluating strategic acquisitions, and has deployed its OTOZ SaaS platform in 60 dealerships across 37 states.
  • Negative Sentiment: The company incurred a $134K foreign currency exchange loss this quarter versus a $1.3 M gain last year, highlighting currency volatility risks.
AI Generated. May Contain Errors.
Earnings Conference Call
NetSol Technologies Q1 2024
00:00 / 00:00

There are 6 speakers on the call.

Operator

Greetings, and welcome to the NetSol Technologies First Quarter 2024 Earnings Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Patty MacLassen, General Counsel.

Operator

Thank you, Patty. You may begin.

Speaker 1

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 will 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 certain aspects of the company's future, and our actual results could differ materially from those stated or implied.

Speaker 1

These forward looking statements qualified by the cautionary statements contained in NetSol's press releases and SEC filings, including our annual report on Form 10 ks 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. Finally, I would like to remind everyone that this call will be recorded made available for replay at www.netsultech.com and via link available in today's press release. Now, I'd like to turn the call over to Najeeb.

Speaker 1

Najeeb?

Speaker 2

Thank you, Perry, and good morning, everyone. We had a strong Q1 of 2024, which was highlighted by increases in total net revenues, Improved gross margin and profitability. Revenue grew in the Q1 due to solid performance across our business. Each of our 3 complementary revenue streams contributed meaningfully. Importantly, We recognized approximately $1,300,000 in licensing revenues from Isuzu Motors, a multinational auto manufacturer based in Japan.

Speaker 2

Our goal going forward is to sign more licensing deals so that we can drive more consistent license revenue from quarter to quarter. In addition to the licensing fees, We also continue to see consistent revenue recognition from subscription and support or SaaS based revenue as well as our services revenue, which is generated after a licensing deal is signed. Also on display this quarter was the impact of increased cost discipline across the organization. Cost containment remains a priority as we focus on freeing capital to allocate to our 2 most Vibrant growth opportunities, the growth of our SaaS business and the penetration of the U. S.

Speaker 2

Market. Our expansion in the U. S. Continues to progress as we focus on staffing our new office in Austin, Texas with the best talent available. Our goal with this facility is to aggressively expand NetSol into the United States, which is a largely untapped market for us.

Speaker 2

In addition to organic growth in the U. S, we continue to carefully to evaluate strategic acquisition opportunities in North America. We also now live with OTOZ, our SaaS based White label platform providing long term on demand mobility models and retail solutions in 60 Mini Anywhere dealerships across 37 U. S. States, demonstrating the demand of our SaaS products in this market.

Speaker 2

On the business development front, we continue to see strong activity and remain focused on building a pipeline of potential licensing deals. In summary, we are very pleased with the results we delivered this quarter. Our performance reflects the earnings potential of the NetSol business model as we scale revenue. We are working diligently to drive more predictable revenue with additional licensing deals and continued Expansion of our SaaS offerings, which we believe will drive improved and more consistent Profitability and cash generation. I'll now turn the call over to Roger Armen, our Chief Financial Officer, to go over our financials from this quarter.

Speaker 2

Roger?

Speaker 3

Thanks, Najeeb. Our total net revenues for the Q1 of fiscal 2020 For, were $14,200,000 compared with $12,700,000 in the prior year period. On a constant currency basis, net revenues were $14,300,000 License fees were approximately $1,300,000 compared with $250,000 in the prior year period and the same on a constant currency basis. Recurring revenue or subscription and support revenues for the Q1 were $6,500,000 compared with $6,000,000 in the prior year period and the same on a constant currency basis. Total services revenues for the Q1 were $6,400,000 compared with $6,400,000 in the prior year period and $6,500,000 on a constant currency basis.

Speaker 3

Total cost of revenues were $8,100,000 for the Q1 compared to $8,500,000 in the Q1 of fiscal year 2023. On a constant currency basis, total cost of revenues was $9,600,000 Gross profit for the Q1 of fiscal 2024 was $6,200,000 or 43 percent of net revenues compared with $4,300,000 or 33% of net revenues in the prior year period. On a constant currency basis, gross profit was 4,700,000 Operating expenses for the Q1 were $5,800,000 or 41 percent of sales compared to $6,100,000 for 48% of sales in the same period last year. On a constant currency basis, operating expenses for the Q1 were 6,400,000 or 45% of sales. Turning to our profitability metrics, our GAAP net income attributable to NetSol for the Q1 of fiscal 2024 totaled $31,000 or $0.003 per diluted share compared with a GAAP net loss of $621,000 or a loss of $0.06 per diluted share in the Q1 of last year.

Speaker 3

Included in our net income this quarter was a loss of $134,000 on foreign currency exchange transactions compared to a gain of approximately $1,300,000 in the Q1 of last year. On a constant currency basis, we realized a loss of 174 A significant portion of our business is conducted in currencies other than the U. S. Dollar. A decrease in the value of the U.

Speaker 3

S. Dollar compared to foreign Currency exchange rates generally has the effect of increasing our revenues, but it also increases our 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.

Speaker 3

Non GAAP adjusted EBITDA for the Q1 of fiscal 2024 was 4 Please see the reconciliation schedules contained in our earnings release for our revised calculations of adjusted EBITDA for the quarters ended September 30, 2023, 2022. Turning to our balance sheet. At Quarter end, we had cash and cash equivalents of approximately $16,600,000 or approximately $1.46 per diluted common share. Total stockholders' equity at September 30, 2023 was $36,700,000 or $3.22 per diluted share. That concludes my prepared remarks.

Speaker 3

I'll now turn the call back over to Najeeb. Najeeb?

Speaker 2

Thank you, Roger. This was an excellent quarter for us. Our focus is on more consistently delivering solid revenue growth, maintaining cost discipline across the company and executing on our strategy to drive our SaaS business and penetrate the U. S. Market.

Speaker 2

This is how we build long term value for the shareholders. With that, I'd like to open the call for questions. Operator?

Operator

Thank you. We will now be conducting a question and answer A confirmation tone will indicate your line is in the question Thank you. Our first question is from Tyler Brewer with PhoneWords Capital. Please proceed with your question.

Speaker 4

Yes. Hey, thank you for taking my question. So I was just wondering, could you talk a little more about, the long term strategy for the U. S. And whether you think you can replicate some of the success you've had overseas?

Speaker 2

Yes. I think it's a twofold question. 1 is, of course, what are we doing now short term as you heard in the presentation. We are very focused on driving business from our pretty strong pipeline across the globe. As you know, these license deals are high in value, but they also take time to close if we win this deal.

Speaker 2

So that is an ongoing process. In addition to that, our SaaS business, mobility is quite, I think impressive for us the way we look at it. The long term, I think I feel continue to invest in North America, which is our we believe not only is untapped market, but also it's a very strong and resilient market for our business. Given all the challenges across the globe, I feel both U. S.

Speaker 2

And China are very I was personally there just recently and met with all the customers and our employees and the environment It's still very robust for our company. So I think in the long term, we feel that our growth will come from the U. S, North America, Canada and U. S. There's a lot of activities going on, given the new office.

Speaker 2

We will continue to invest in the new talent. We have been assembling some good people locally, in all the key positions because I think for us to make a solid name in the market And scale our business, we need to have a lot more new executive level positions, so that we are not dependent on People traveling regularly to U. S. From different countries, so we are now investing and building up Austin, Texas office with the right talent both in sales, marketing and client relations. That is really to me is the Future, because once we have a bigger scale and capability on-site, everyone knows our customers and new prospect that our Amazing dependency on our technology campus in Lahore, Pakistan, which is the state of the art, supports our customers worldwide and never missed our deliveries of commitment.

Speaker 2

So we're pretty confident for our future outlook long term because investment in U. S, continued Growth in the U. S, China and also looking at many other markets in Mexico, which we have a lot of customers and North America, of course, combined China and So I feel quite good about it, about the future outlook.

Speaker 4

Got it. Thank you. Thanks. That's thank you for answering my questions Congratulations on the quarter.

Operator

Thank you. Thank you. Our next question is from Todd Felty with Aegis Financial. Please proceed with your question.

Speaker 5

Hey, congratulations on the return to profitability and thank you for taking my questions.

Speaker 2

Sure. Thank

Speaker 5

you. Just had a few here. First of all, do you expect the margins and Profitability to continue and are you still standing by? I believe it was the last quarterly conference call you had estimated revenues for this year Would be somewhere $60,000,000 to $62,000,000 Are you still standing by that?

Speaker 2

Yes. So far, we are Leaving as is and the best time would be to formally update in the Q2, which will be half 1 and will be in a better position to update or even improve the guidance. So I think now pretty strong about it, yes. And the profitability is a function of revenue. Our margins improved to 43% this quarter versus almost 27% previous quarter.

Speaker 2

So it's a sign that we are becoming efficient. We have cut down costs across the company, but we're investing in the right people, right talent and the revenue growth is our number one focus, of course, and of course, all the key metrics. Of course, bottom line will be the result of how fast we grow the revenue and the gross margins.

Speaker 5

Okay. That's great to hear. And this is more of a general question, but as you're bidding for new customers, what percent would you say of Customers that you bid on for a software project, do you actually land?

Speaker 2

Well, that's a very good question. It's a I think some of our listeners are investors who've been following us for some time. We are in a very A unique business, a very niche business, few companies are competing with each other. Some are very big, some are about same We are, whether we are in North America or Europe or Asia. I think pipeline is we don't mention the pipeline.

Speaker 2

We have a robust pipeline, Pretty large size. Some are we believe we can achieve some successes in In near future, some will take some bit more time. If I say, if you have 10 deals out there and we close 3 of them, That will be the great day for the company because it is a tough competition, because it's very niche and few companies. Secondly, I think that we definitely are We're working diligently to improve our scale and capability in the U. S, which is again the very robust and strong market for us.

Speaker 2

And As we get stronger in the U. S, our chances to win U. S. Business will only get better.

Speaker 5

Okay. And so if you land about 3 out of 10 of the contracts you bid on, what do you think is the number one reason why you don't land those other 7 or what are the areas you're improving on? Is it does it relate to this capabilities of your product?

Speaker 2

I think, Todd, one thing for sure. Like I said, whether investors long term funds or our customers who know us well our capabilities, our strength and our opportunities that we have. U. S. Is the most challenging market, but also Most incredible market to work in and we are working on it diligently.

Speaker 2

What happens is, in every RFPs, We get invited at least 5 top companies, sometimes 5 to 7, and then we become Shortlisted, in most cases, we do become shortlisted. Often times, the contracts are really large in size and value, Then they prefer to look into U. S. Company, which have very strong U. S.

Speaker 2

Presence. And we understand that because these customers, want to depend on the local There's a company that got 70,000 employees, for example, I'm not going to share the name here, and we compete with them. Sometimes we win over them, sometimes they win over us. In China, we have beaten them many times in major contracts. So I think companies look for Scale capability, but there are companies, which are midsized, mid tier company, which is our right spot for us and most cases we win them.

Speaker 2

So I think it's a mixed thing. Competition is good for us. It makes us better and stronger to be able to compete with the big guys. We have beaten Many times, we once won over SAP years ago in China because we were so strong in China, still are the number one company in China in this space. U.

Speaker 2

S. Is a very big market. We will do well in the coming 3 to 5 years and positioning is the way that we get the right people, Partners, joint ventures and there's lots going on. Some I'm not in the liberty of sharing because they're not public information yet. As they become material, we'll of course disclose and share with the market.

Speaker 2

So Overall, I'm very excited and bullish about the U. S. Market.

Speaker 5

Great. That's helpful. And then my last question is, I noticed the dramatic improvement in Net So Pakistan, which I think you own over 60% of, but I've been looking at the minority interest or your non controlling interest Investments and it seems like over the last year and a half that's cost you about $4,000,000 Can you kind of discuss that and what your plans are because That's a lot of money to a company that's just now breaking into profitability.

Speaker 2

Okay. Very good question. Look, NTI, the parent company, this company owns 67% of Nasrul Pakistan, so minority interest about 33% of which I think mostly funds institutions, some are by family ownership, which is not that much. We have more ownership with the parent company than NTI. Secondly, I think, yes, it was a good quarter.

Speaker 2

Continuously, we are investing in Lahore because what happens is, As you know, AI is a new revolution and our AWS and some other mobility platform, these are 3 very important New areas that we've been investing. We hired some MIT PhDs and AI specialists. They're helping us develop some solutions. We have built up some more scale in the AI side in the U. S.

Speaker 2

And in Lahore, Pakistan because we want to provide proactively Some part of the AI tools to our customers because every customer eventually will embrace and adopt AI tools and technology. So we are As small companies we are, we're still ahead of the curve because we don't want to be left behind. So we are investing in those areas. And then of course, we continue to invest in the younger New generation because some are being retired, are we bringing new fresh blood in programming, new tools equipped with all the digital in our mobility platform. So there's lots going on.

Speaker 2

This company is It's not only a technology company, but also it has vision for the innovation. And the last thing we want to be is left behind in the curve. This company is always ahead of the curve making the investment in the right place and that takes cash investment and but we are streamlining our headcount completely all over the globe, not just in Pakistan. So all in all, I feel very comfortable about our strategy. We will execute what we promised this year and we'll get stronger and stronger in coming years.

Speaker 5

All right. Thank you for taking my questions. I'll hop back in the queue. Thank you.

Speaker 2

Welcome. Thank you.

Operator

Thank you. There are no further questions at this time. I'd like to hand The floor is back over to Najeeb Ghauri for any closing comments.

Speaker 2

Thank you for joining us today. I especially want to thank our investors for their continued support, our loyal customers and our most dedicated employees worldwide for their ongoing contributions. We will look forward to updating our call our earnings call next call. Thank you very much.

Speaker 4

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.

Powered by Quartr