Earnings Call Transcript - NTWK Q3 2022

Operator, Operator

Good morning. Welcome to the NETSOL Technologies Fiscal Third Quarter 2022 Earnings Conference Call. Today, we have Najeeb Ghauri, Chairman and Chief Executive Officer; Roger Almond, Chief Financial Officer; and Patti McGlasson, General Counsel and Senior Vice President, Legal and Corporate Affairs. I would now like to turn the call over to Patti McGlasson to provide the necessary cautions regarding the forward-looking statements made by management during this call. Thank you, Patti. Please proceed.

Patti McGlasson, General Counsel and Senior VP, Legal and Corporate Affairs

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 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 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?

Najeeb Ghauri, Chairman and CEO

Thank you, Patti, and good morning, everyone. With our third quarter performance, we remain on track to achieve our fiscal 2022 growth targets of 10% top line growth and 20% growth in recurring revenues. Importantly, for the nine months ended March 31, our team has far exceeded our target, growing annual recurring revenues by 34%. Our pipeline and mix of opportunities in our core business 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. The rollout of our OTOZ digital platform in partnership with MINI Anywhere accelerated in the third quarter; we ended the March quarter with 17 dealerships subscribed, 11 in California, and one in Texas, and expanded this to a total of six states, adding dealerships in Florida, Pennsylvania, New York, and New Jersey. In California, we now live in 70% of the MINI dealerships; in Pennsylvania, we've already captured 75% of all dealerships. In the long-term, this solution to my user base monthly mobility startup OTOZ has the potential to be rolled out to over 100 MINI dealerships across all 50 states. Our employees continue to return to our global offices. We ended the quarter with nearly 40% of our employees back in our Lahore technology campus, which is home to the majority of our workforce and heart of our technology operations. Additionally, since the start of the fiscal year, we have increased our headcount by nearly 70 employees, mostly stationed at the national technology campus in Lahore, to support additional implementation work and innovation initiatives. Our results for the first nine months of fiscal 2022 clearly demonstrate we are delivering on our promise of returning to meaningful growth. And we are confident that the investments we will be making in our leadership, workforce technology, and expanded sales efforts will lead to outsized returns in fiscal 2023 and beyond. With this 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?

Roger Almond, CFO

Thanks, Najeeb. Turning to our fiscal third quarter 2022 results for the period ended March 31. Our total net revenues were 14.8 million, compared with 13.8 million in the prior year period. The 7% increase in total net revenues was primarily driven by increases in subscription and support revenues of 900,000 and services revenue of 600,000, slightly offset by a decrease in license fees of 500,000. Total subscription and support revenues in Q3 were 6.6 million compared to 5.7 million in the prior year period. The increase was due to the new subscription licensing deals and increased maintenance related to the change with our Daimler Financial Services contract discussed on last quarter's call. Total services revenue for the quarter was 6.6 million compared to 6 million in the prior year period. The increase is primarily due to an increase in implementation services revenue related to our GAC Sofinco contract, which increased from 927,000 in Q3 of fiscal year 2021 to 1.9 million in Q3 of fiscal year 2022 and offset by a decrease of 400,000 among other customers. Total cost of revenues was 9 million for the third quarter, an increase of 1.6 million from 7.4 million for the third quarter 2021. The increase is primarily due to increases in salaries of 1.4 million, travel of 105,000, and other expenses of 145,000. Gross profit for the third quarter for fiscal 2022 was 5.8 million, or 39% of net revenues compared to 6.4 million, or 47% of net revenues in the third quarter of fiscal 2021. The decrease in gross profit was primarily due to an increase in cost of sales of 1.6 million driven by increases in salaries and consulting costs of 1.4 million. Operating expenses for the third quarter of fiscal 2022 were 6.4 million, or 43% of sales, compared to 6 million, or 43.3% of sales for the third quarter fiscal 2021. The increase in operating expenses was primarily due to increases in selling and marketing expenses offset by a decrease in general and administrative expenses. Our GAAP net loss attributable to NETSOL for the third quarter fiscal 2022 totaled 300,000, or $0.02 per diluted share, compared with the GAAP net loss of 600,000, or $0.05 per diluted share in the third quarter fiscal 2021. As I mentioned on previous calls, it's important to point out that included in our net income this quarter was a gain of 500,000 on foreign currency exchange transactions compared to a loss of 1.8 million in Q3 of last year. 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. Similarly, 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, our non-GAAP adjusted EBITDA for the third quarter fiscal 2022 totaled 400,000, or $0.03 per diluted share, compared with non-GAAP adjusted EBITDA of 200,000, or $0.02 per diluted share in the third quarter of fiscal 2021. Please see the reconciliation schedules contained in our earnings release for revised calculations of adjusted EBITDA for the fiscal quarter ended March 31, 2022. Turning to our balance sheet. At the quarter end, we had cash and cash equivalents of approximately 30.6 million, or approximately $2.72 per diluted common share, which is down from 33.7 million, or approximately $2.93 per diluted common share at June 30, 2021. One final note, before I hand the call back over to Najeeb regarding our financial outlook for the fiscal year ending June 30, 2022, the company continues to expect total revenues to increase by at least 10% in subscription and support or recurring revenues to increase by at least 20%. This guidance is based on existing contracts and recurring revenue from its current customer base, performance results tracked through January 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 update. Najeeb?

Najeeb Ghauri, Chairman and CEO

Thank you, Roger. I'll now provide updates on the key components of our overarching strategy. Our recurring revenues from our SaaS and support segments have reached an annualized run rate of over 26 million in the third quarter. As our workforce returns to onsite operations globally, we expect this growth to continue accelerating. As Roger mentioned, our cash position is robust, offering additional resources for our core business and strategic investments in high-growth long-term opportunities, such as our work in the OTOZ innovation lab. We are confident in maintaining our full-year revenue guidance of a 10% increase or $61 million in net revenue, with a 20% rise in our recurring subscription revenue. Another facet of our growth strategy involves innovating new areas and forming technology and personnel partnerships that benefit both our customers and our organization. I'd like to provide a brief update on our progress within the OTOZ innovation lab, particularly highlighting our partnership with MINI Anywhere. This initiative collaborates with BMW Group Financial Services in North America through MINI Anywhere to deliver a fully digital shopping experience for customers in the USA, enhancing their marketing strategies and creating an automated sales channel for dealerships and lenders. The OTOZ digital retail platform for MINI Anywhere has gained recognition in major publications like Newsweek, Automotive News, and ABC News. Since its launch at the end of fiscal 2021, the platform has rapidly gained traction. At the end of the quarter, MINI Anywhere was operational with 17 MINI dealerships, an increase from 12 at the end of December. Notably, we now serve 70% of all MINI dealerships in California and 75% in Pennsylvania, a state we entered in the third quarter. We are currently active in six states, up from two at the end of December. In addition to Pennsylvania, we also launched dealers in Florida, New York, and New Jersey during the third quarter. We anticipate this early momentum to grow over the coming months. The success of this program can be attributed to several factors, and I'd like to share a critical data point. In the fiscal third quarter, we achieved a blended lead conversion rate of 22%, meaning for every five opportunities identified on our platform, one results in a vehicle sale. This ratio improved from one in six at the end of the first fiscal quarter. Given the global inventory shortages in the auto industry, this performance is a major driver for expanding our solution to more dealers in the coming weeks. We appreciate MINI’s confidence in our product and look forward to further strengthening our regional partnership. Looking ahead, we will roll out significant enhancements to the platform, including financing and insurance protection products for digital sales, as well as additional support for used car inventory, which has been a popular request given current market conditions. The final component of our strategy involves exploring organic opportunities, such as M&A and joint ventures when appropriate. I can share that we are evaluating highly accretive opportunities in the marketplace that align with our business strategy. In operational updates for the quarter, regarding our flagship NFS solution, we signed a contract with a European bank covering multiple countries. This contract is contingent on an ongoing discovery phase and marks NETSOL Europe's newest client, indicating strong potential for expansion across Europe. The New Zealand Kubota project saw a soft launch last August and is in the process of transitioning to maintenance. The Australian Kubota project's mapping was completed during Q3, and proposals have been submitted. Our previously announced multimillion dollar upgrade with GAC Sofinco in China is progressing well, with a fall 2023 go-live anticipated and key activities completed during Q3 setting the stage for critical deliveries in May and July. Regarding our North American operations, last July we announced our first official sale of NFS Ascent in the U.S. market through an agreement with a motorcycle group to implement the cloud-based version of our flagship platform across its operations. This includes a point-of-sale and contract management system to support retail, lending, and leasing. The motorcycle group offers simultaneous lease and loan options to qualified applicants, enabling dealers to optimize their sales and assisting customers in prequalifying and selecting their vehicles. The implementation began in July, and all necessary workshops are complete, with the expected go-live date still on track for 2022. Going forward, we plan to leverage this significant agreement to potential clients throughout North America. Our pipeline of opportunities in the APAC region continues to show steady growth following a pandemic-induced pause in new business development. We are encouraged by the quality of opportunities arising in our largest market and believe the ongoing recovery reflects a broader return to work across our global operations. New growth areas in our European and North American pipelines remain promising, with strategic marketing of our cloud and SaaS-based offerings contributing to the increase in subscription and support revenues. We have several large opportunities for our flagship Ascent in the U.S. alongside new opportunities in Europe moving through the sales cycle. While we cannot control the timing of these deals, we believe our current momentum and the critical mass of potential deals are promising for significant gains in the upcoming months. Our current pipeline across North America represents the strongest near-term growth opportunity for our business, making it essential to get these first implementations underway. In summary, our solid performance in fiscal 2022 persists. We are seeing a healthy recovery across all our operational regions and are making investments today that will ensure sustainable growth for the future. Now, we can open the call for questions.

Operator, Operator

Our first question comes from Todd Felte with Aegis Financial Services.

Todd Felte, Analyst

I noticed in the last conference call that you had mentioned that we would be going live in India through the Daimler Financial Services contract in early calendar 2022. We're into May now. Is there any update on when that will occur?

Najeeb Ghauri, Chairman and CEO

Yes. Thank you for asking the question, Todd. Yes, we did go live about a month ago in India; it's all live and running very well.

Todd Felte, Analyst

Okay. I appreciate the color on that. Also, I've been looking at the financials here, and it seems we're under a little bit of margin pressure. I know our revenue has gone up in the 9 months, a little over $4 million, but our gross profit is flat, and our income from operations is down a little bit. Is there a plan to kind of deal with this and improve margins? Or is this just kind of a temporary problem caused by inflation and increasing labor costs?

Najeeb Ghauri, Chairman and CEO

I think it's actually a couple of points I want to add to that question, Todd. One is, as the company has pivoted almost over a year ago to a SaaS model in relation to our license sale, so you'll notice our SaaS revenue is growing; the recurring revenue is growing at the expense of sometimes large license implementations or contracts. That doesn't mean that we're not busy with the license opportunities in some regions like the U.S. and Asia that will continue to improve our revenue as well as gross margin. And the second thing is, as you noticed, as Roger mentioned, we hired a few people in the last two quarters, primarily to support our new initiatives, whether they're innovative-related or ongoing business opportunities in North America particularly. We are in an investment mode in the U.S., in North America, especially both Canada and the U.S. by hiring new people to position ourselves to be a stronger operator in the U.S. market, which we haven't been in the past. So I believe all these investments in hiring more technology-related personnel and paying better salaries because the market conditions are so much in demand for these technology professionals all over the world, even in our home country where we have the major workforce. So it's a time to invest in people, bring new talent, and look at the future. This is why the margins are a bit shrinking. But this is temporary. I think it will improve as the sales growth continues to improve and as we achieve more economy of scale in this operation worldwide, and then I think we can really look at a much better gross margin. Historically, we've been over 55% to 50%, and I intend to improve that to that level in the coming quarters.

Todd Felte, Analyst

Okay. That’s great to hear. And then finally, my last question. I look at the stock and we’ve got a book value of around $5 a share. And the stock really hasn’t done much. If you look at it, even going back a couple of years to 20 years. It doesn’t really seem like shareholder value is being maximized. Is there any update with the share buyback program, which I know we’ve had some of those in the past or possibly the initiation of a dividend to return a little value to shareholders?

Najeeb Ghauri, Chairman and CEO

Look, we have done a very effective buyback program a year ago. I mean it’s almost close to 1 million shares, invested almost $3.5 million, made $4 million at that time. Right now, what we’re looking at is two major opportunities and challenges. One is, of course, globally, all the difficult times all regions are facing, North America, Asia, and of course, Europe. You know what those macro challenges are. And it also sometimes slows down the activity. But at the same time, the cash we have in the bank is really, I believe, well served to invest in the company, invest in the right talent and in some new technologies. And we also know what is out there six months from now or three months from now, are we heading into a recession or are we already in a recession? So the company needs to be very careful to preserve cash to invest in the right place. And the time will come if we see that we have enough cash that we can allocate to another buyback program that without disrupting or without continuing our growth strategy and the things we’re doing, I think that’s when we can go back to the board and extension of a buyback. Right now, we’re already in a good place to invest carefully, improve our cash flow reserves, and make sure the company is strong financially to weather all the difficult times facing the world.

Operator, Operator

Okay. At this time, I'm not seeing any other questions. I'd like to pass it back over to Najeeb for any closing remarks.

Najeeb Ghauri, Chairman and CEO

Thank you, everyone, for joining our call today. I appreciate your support and your patience in this company. And I think we'll continue to do our good work and try to make better progress in the coming quarters and coming years. But thank you again, and we see you next time. Goodbye.

Operator, Operator

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.