NetSol Technologies, Inc. (NASDAQ:NTWK) Q1 2024 Earnings Call Transcript

NetSol Technologies, Inc. (NASDAQ:NTWK) Q1 2024 Earnings Call Transcript November 7, 2023

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. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Patti McGlasson, General Counsel. Thank you, Patti. You may begin.

Patti McGlasson: 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 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 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. 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’d like to turn the call over to Najeeb. Najeeb?

Najeeb Ghauri: Thank you, Patti, and good morning, everyone. We had a strong first quarter of 2024, which was highlighted by increases in total net revenues, improved gross margin and profitability. Revenue grew in the first quarter due to solid performance across our business. Each of our three complementary revenue streams contributed meaningfully. Importantly, we recognized approximately $1.3 million in licensing revenues from Isuzu Motors, a multi-national auto manufacturer based in Japan. Our goal going forward is to find 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 two most vibrant growth opportunities, the growth of our SaaS business and the penetration of the US market. Our expansion in the US 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. In addition to organic growth in the US, we continue to carefully evaluate strategic acquisition opportunities in North America. We’re also now live with Otoz, our SaaS based white label platform, providing long-term, on-demand mobility model and retail solutions in 60 MINI Anywhere dealership across 37 US states, demonstrating the demand of our SaaS products in this market.

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 Almond, our Chief Financial Officer, to go over our financials from this quarter. Roger?

Roger Almond: Thanks, Najeeb. Our total net revenues for the first quarter of fiscal 2024 were $14.2 million compared with $12.7 million in the prior year period. On a constant currency basis, net revenues were $14.3 million. License fees are approximately $1.3 million 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 first quarter were $6.5 million compared with $6 million in the prior year period and the same on a constant currency basis. Total services revenues for the first quarter were $6.4 million compared with $6.4 million in the prior year period and $6.5 million on a constant currency basis. Total cost of revenues were $8.1 million for the first quarter compared to $8.5 million in the first quarter of fiscal year 2023.

On a constant currency basis, total cost of revenues was $9.6 million. Gross profit for the first quarter fiscal 2024 was $6.2 million or 43% of net revenues compared with $4.3 million or 33% of net revenues in the prior year period. On a constant currency basis, gross profit was $4.7 million. Operating expenses for the first quarter were $5.8 million or 41% of sales compared to $6.1 million or 48% of sales in the same period last year. On a constant currency basis, operating expenses for the first quarter were $6.4 million or 45% of sales. Turning to our profitability metrics. Our GAAP net income attributable to NetSol for the first quarter 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 first quarter of last year.

Included in our net income this quarter was a loss of $134,000 on foreign currency exchange transactions compared to a gain of approximately $1.3 million in the first quarter of last year. On a constant currency basis, we realized a loss of $174,000 on foreign currency exchange transactions. Because we operate in several geographical regions, a significant portion of our business is conducted in currencies other than the US dollar. A decrease in the value of the US dollar compared to foreign currency exchange rates generally has the effect of increasing our revenues, but it also increases our expenses denominated in currencies other than the US dollar. Likewise, as the US 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 US dollar.

Moving to our non-GAAP metrics. Non-GAAP adjusted EBITDA for the first quarter of fiscal 2024 was $466,000 or $0.04 per diluted share compared with a non-GAAP adjusted EBITDA loss of $28,000 or $0.002 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 quarters ended September 30, 2023 and 2022. Turning to our balance sheet. At quarter end, we had cash and cash equivalents of approximately $16.6 million or approximately $1.46 per diluted common share. Total stockholders’ equity at September 30, 2023 was $36.7 million or $3.22 per diluted share. That concludes my prepared remarks. I’ll now turn the call back over to Najeeb.

Najeeb?

Najeeb Ghauri: 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 US market. This is how we build long-term value for the shareholders. With that, I’d like to open the call for questions. Operator?

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Q&A Session

Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question is from [Tyler Brewer with Stone Works Capital] (ph). Please proceed with your question.

Unidentified Analyst: 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 US market and whether you think you can replicate some of the success you had overseas?

Najeeb Ghauri: Yeah. I think it’s a twofold question. One 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. So that is an ongoing process. In relation 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 an 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 US and China are very strong markets for us.

I was personally there just recently and met with all the customers and our employees, and the environment is still very robust for our company. So I think in the long term, we feel that our growth will come from the US — north America, Canada and US. There’s a lot of activities going on given the new office. We will continue to invest in the new talent. We have been assembling some good people locally in all the key position 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 US from different countries. So we are now investing and building up our Austin, Texas office with the right talent both in the 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 prospects, that our amazing dependency on our technology campus in Lahore, Pakistan which is state-of-the-art, it supports our customers worldwide and never miss our delivery commitment. So we’re pretty confident for our future outlook long term because investment in the US continues, growth in the US, China and also looking at many other markets, in Mexico, which we have a lot of customers and North America, of course, combined with China and Canada. So I feel quite good about it, about the future outlook.

Unidentified Analyst: Got it. Thank you. Thanks. Thank you for answering my questions, and congratulations on the quarter.

Najeeb Ghauri: Thank you.

Operator: Thank you. Our next question is from Todd Felte with AGES Financial. Please proceed with your question.

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

Najeeb Ghauri: Sure. Thank you.

Todd Felte: 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 at the last quarterly conference call, you had estimated revenues for this year would be somewhere $60 million to $62 million. Are you still standing by that?

Najeeb Ghauri: Yes. So far, we are leaving that as is. And the best time would be to formally update in the second quarter, which will be [half 1] (ph), and we’ll be in a better position to update or even improve the guidance. So I think now I feel pretty strong about it, yes. And the profitability is a function of essentially revenue. Our margins improved to 43% this quarter versus almost 27% previous quarter. So it’s a sign that we are becoming efficient. We have cut down costs across the company. 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, a little bit the result of how fast we grow the revenue and the gross margins.