Earnings Call Transcript - NTWK Q1 2024

Operator, 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, Patti McGlasson, General Counsel. Thank you, Patti. You may begin.

Patti McGlasson, General Counsel

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 Ghauri, CEO

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 multinational 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 dealerships 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 Almond, CFO

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 Ghauri, CEO

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, Operator

Thank you. We will now be conducting a question-and-answer session. Our first question is from Tyler Brewer with Stone Works Capital. Please proceed with your question.

Unidentified Analyst, 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, CEO

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 impressive for us, the way we look at it. The long term I think, I feel, continue to invest in North America, which we believe is not only an untapped market, but also a very strong and resilient market for our business. Given all the challenges across the globe, I feel both the 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 the US. There's a lot of activities going on given the new office. We will continue to invest in 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 the US from different countries. So we are now investing and building up our Austin, Texas office with the right talent both in sales, marketing, and client relations. That is really, to me, 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, supports our customers worldwide and never misses our delivery commitment. So we're pretty confident about our long-term outlook because our investment in the US continues, as well as growth in the US and China, and also looking at many other markets, including Mexico, where we have a lot of customers and North America, combined with China and Canada. So I feel quite good about it and about the future outlook.

Unidentified Analyst, Analyst

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

Najeeb Ghauri, CEO

Thank you.

Operator, Operator

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

Todd Felte, Analyst

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

Najeeb Ghauri, CEO

Sure. Thank you.

Todd Felte, Analyst

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 between $60 million to $62 million. Are you still standing by that?

Najeeb Ghauri, CEO

Yes. So far, we are leaving that as is. And the best time would be to formally update in the second quarter, and we'll be in a better position to update or even improve the guidance. So 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% in the 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 and right talent. And the revenue growth is our number one focus, of course, and all the key metrics. Of course, the bottom line is a little bit the result of how fast we grow the revenue and the gross margins.

Todd Felte, Analyst

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?

Najeeb Ghauri, CEO

Well, that's a very good question. I think some of our listeners or investors who have been following us for some time know we are in a very unique or niche business. Few companies are competing with each other. Some are very big, while others are of a similar scale as we are, whether in North America, Europe, or Asia. I think the pipeline is robust. We have a pretty large size. Some of our deals we believe we can achieve success in the near future, while others will take a bit more time. If I say, if we have 10 deals out there and we close three of them, that will be a solid day for the company because it is tough competition, given it's a very niche market. Secondly, I think that we are diligently working to improve our scale and capability in the US, which is again, a very robust and strong market for us. As we get stronger in the US, our chances to win US business will only get better.

Todd Felte, Analyst

Okay. And so if you land about three 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 seven? Or what are the areas you're improving on?

Najeeb Ghauri, CEO

I believe that, as investors and long-term partners who are familiar with our capabilities and strengths, it's clear that the US market is both the most challenging and the most incredible to operate in. We are working hard in this area. In every RFP we receive, we are typically competing with five to seven top companies, and we often make it to the shortlist. In most instances, we do make the shortlist. Many contracts are substantial in size and value, and clients tend to favor US firms with a strong local presence, which we understand since they prefer to rely on companies based domestically. For instance, there's a firm with 70,000 employees, though I won't disclose their name. Sometimes we secure contracts over them, and other times they prevail. In China, we have successfully competed against them for significant contracts. Companies look for both scale and capability, but there are also mid-tier firms that fit well for us, often enhancing our strength against larger competitors. We have successfully outperformed several major firms, including SAP years ago in China, where we continue to maintain the top position. The US market is substantial, and we anticipate strong performance over the next three to five years. Positioning ourselves correctly is crucial for securing the right people, partners, and joint ventures. There are many developments occurring, some of which I cannot disclose yet as they are not public. Once they become material, we will share them with the market. Overall, I am very optimistic about our prospects in the US.

Todd Felte, Analyst

Great. That's helpful. And then my last question is, I noticed the dramatic improvement in NetSol Pakistan, which I think you own over 60% of. But I've been looking at the minority interest or your noncontrolling interest investments, and it seems like over the last 1.5 years, that's cost you about $4 million. 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?

Najeeb Ghauri, CEO

Okay. Very good question. Look, NTI, the parent company, owns 67% of NetSol Pakistan. So the minority interest is about 33%, with most being institutional funds and some family ownership, which is not that much. We have more ownership than the parent company, NTI. Secondly, yes, it was a good quarter. Continuously, we are investing in Lahore because, as you know, AI is a new revolution, and our AWS and other mobility platforms, these are three very important new areas that we've been investing in. We’ve hired some MIT PhD and AI specialists. They're helping us develop some solutions. We've built up some more scale in the AI side in the US and in Lahore, Pakistan, as we want to proactively provide some part of AI tools to our customers because every customer eventually will embrace and adopt AI tools and technology. So as a small company, we are still ahead of the curve because we don’t want to be left behind. We are investing in those areas. And then, of course, we continue to invest in the younger, new generation because some are retiring. We're bringing in new talent in programming and new tools, equipment, and all the digital mobility platforms. So there's lots going on. This company is not only a technology company but it also has a vision for innovation. And the last thing we want to be is left behind. This company is always ahead of the curve, making the right investments. And that takes cash and investment. However, we are streamlining our headcount completely all over the globe, not just in Pakistan. Overall, I feel very comfortable about our strategy. We will execute what we promised this year and grow stronger in the coming years.

Todd Felte, Analyst

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

Najeeb Ghauri, CEO

Sure. You're welcome. Thank you.

Operator, Operator

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

Najeeb Ghauri, CEO

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 look forward to updating our earnings call next time. Thank you very much.

Operator, Operator

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