Earnings Call Transcript - NTWK Q2 2026

Operator, Operator

Good morning, and welcome to the NetSol Technologies Second Quarter and 6 Months Ended December 31, 2025, Earnings Conference Call. On the call today are Founder and Chief Executive Officer of NetSol Technologies, Inc., Najeeb Ghauri; Co-Founder and President, Naeem Ghauri; Chief Financial Officer, Sardar Abubakr; and Senior Vice President, Legal and Corporate Affairs, General Counsel and Corporate Secretary, Patti McGlasson. I will now hand the call over to Patti, who will provide the necessary disclaimers regarding forward-looking statements made during today's call. Patti, please go ahead.

Patti McGlasson, Senior Vice President, Legal and Corporate Affairs

Good morning, everyone, and thank you for joining us today. After reviewing the company's business highlights and financial results for the second quarter and six months ending December 31, 2025, we will open the call for questions. Before we begin, I'd like to remind you that our remarks today may include forward-looking statements under federal securities laws, including the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements reflect management's current expectations and are subject to risks and uncertainties, and actual results may differ materially from those expressed or implied. We encourage you to review the cautionary statements and risk factors contained in NetSol's press release issued earlier today as well as in our filings with the Securities and Exchange Commission, including our most recent Form 10-K and quarterly reports on Form 10-Q. I'd also like to note that today's discussion will include certain non-GAAP financial measures. A reconciliation of these measures to their most direct comparable GAAP figures can be found in the press release issued earlier today. Lastly, please remember that this call is being recorded and will be available for replay on our website at netsoltech.com and through a link included in today's press release. I will now hand the call over to our Founder and CEO, Najeeb Ghauri. Najeeb?

Najeeb Ghauri, CEO

Thank you, Patti. Good morning, everyone, and thank you for joining NetSol Technologies call to review our results for the second quarter and 6 months ended December 31, 2025. We delivered a strong second quarter of fiscal 2026. Total net revenues increased 21% year-over-year to $18.5 million, driven by higher services revenues and growth in our recurring subscription and support revenues. Services revenue grew 41%, primarily from new implementations from major customers. As these implementations move through go-live and expansion phases, we believe they can support recurring subscription and support revenues over time. I'm pleased with our strong balance sheet. Our current ratio of 2.3 reflects strong liquidity, giving us substantial flexibility for growth initiatives. I'd like to highlight the strategic progress we made during the quarter across product innovation, customer momentum, and leadership. Firstly, on product and innovation, we launched our loan origination platform or Check, our AI-enabled credit decisioning engine. Check is designed to modernize credit underwriting by combining deep reasoning, intelligent automation, and agentic workflows to support faster, smarter, and more consistent credit decisions. It is an important extension of our Transcend platform and reflects our focus on building high-margin products that expand long-term revenue opportunities. Second, on customer momentum, we strengthened a key relationship with a $50 million 4-year contract extension with a Tier 1 global auto captive and long-standing partner. This extension reinforces customer trust, provides meaningful revenue visibility, and validates the scalability of our platform. In addition, Transcend Retail continued to gain traction in the U.S. market with new dealer groups and franchised dealerships signing on during the quarter. Demand for digital automotive retail solutions remains strong, and these wins support our strategy to expand recurring revenue while increasing our footprint in a high potential growth market. Finally, we continue to strengthen our leadership team to support our next phase of growth. During the quarter, we appointed Sardar Abubakr as Chief Financial Officer with Roger Almond transitioning to serve as Chief Accounting Officer. Together, they bring deep financial expertise and will help maintain strong governance, discipline, and transparency as we continue to scale globally. Overall, these milestones reflect solid execution across innovation, customer expansion, and leadership. We remain focused on sustainable growth, deepening customer partnerships, and advancing our position as a trusted technology partner, helping OEMs, dealerships, and financial institutions sell, finance, lease, and manage assets end-to-end. Looking ahead, our pipeline, multi-year contracts, and recurring revenue base provide visibility into near- and long-term performance. We remain focused on disciplined execution and continued progress on growth and profitability. And now I’d like to turn the call over to our President, Naeem Ghauri, who will share an update on NetSol's journey and the latest development with AI and how we are leveraging this transformative technology, both for our products and across our operations. Naeem?

Naeem Ghauri, President

Thank you, Najeeb, and good morning, everyone. I'd like to share a brief update on our AI strategy and progress. Over the past year, our focus has been to embed AI across the Transcend platform and our internal operations horizontally, not as a stand-alone feature, but as workflow capabilities that drive measurable outcomes for our customers. We have built a shared AI layer with reusable components and governance built in, so we can deploy AI consistently across products while maintaining reliability, auditability, and human oversight. Our teams work closely with customers to integrate AI into real-world workflows, so we can adapt general models into domain-specific capabilities tied to ROI and operational impact. AI at NetSol is now integrated into our product development life cycle, supported by dedicated teams, shared tooling, and an integrated roadmap that helps us scale AI in a repeatable way, with evaluation and monitoring designed in from the start. A good example, as Najeeb mentioned, is Check, our AI-enabled credit decisioning capability within our loan origination product. It combines reasoning, automation, and agentic workflows to help underwriting teams move faster with greater precision while keeping humans in the loop. In parallel, we are applying AI internally horizontally to streamline delivery and improve productivity, and we are also exploring value-based pricing approaches for select AI-enabled capabilities. Overall, we believe this strengthens differentiation, supports operating leverage, and positions us to scale AI value responsibly across our business. With that, I'll turn the call over to our CFO, Sardar Abubakr, to review the financial results. Abu?

Sardar Abubakr, CFO

Thank you, Naeem, and good morning, everyone. I will begin with our financial results for the second quarter of fiscal year 2026, followed by results for the 6 months ended December 31, 2025. For the second quarter of fiscal 2026, total net revenues increased 21.1% to $18.8 million compared with $15.5 million in the prior year period, driven primarily by higher services revenues and higher subscription and support revenues. On a constant currency basis, total net revenues were also $18.8 million. Subscription and support revenues increased approximately 5.1% to $9.1 million compared with $8.6 million in the prior year period. On a constant currency basis, subscription and support revenues were $9.2 million. Service revenues increased 40.9% to $9.6 million compared with $6.8 million in the prior year period. Total service revenues on a constant currency basis were $9.6 million. Gross profit was $9 million or 48% of net revenues. On a constant currency basis, gross profit was $9 million or 47.8% of net revenues. Cost of sales was $9.8 million or 52% of net revenues compared with $8.6 million or 55.5% of net revenues in the second quarter of fiscal 2025. On a constant currency basis, cost of sales was $9.8 million or 52.2% of net revenues. The increase primarily reflected increased salaries and travel costs, even though the margin has improved. Income from operations was $1.3 million compared with a loss from operations of $0.5 million in the second quarter of fiscal 2025. On a constant currency basis, income from operations was $1.3 million. Foreign currency movements contributed a gain of $0.05 million in the quarter compared with a $0.7 million loss for the prior year period. Moving to non-GAAP, EBITDA for the quarter was $1.7 million compared with a loss of $0.8 million in the second quarter of fiscal 2025. Overall, the quarter reflected strong top line growth driven by implementation activity, along with continued subscription and support performance. We also delivered meaningful profitability improvement versus the prior year, supported by gross margin expansion and improved operating leverage. Turning now to the 6 months ended December 31, 2025. Total net revenues were $33.8 million compared with $30.1 million in the prior year period. On a constant currency basis, total net revenues were $33.5 million. Recurring subscription and support revenues increased 7.2% to $18 million compared with $16.8 million in the prior year period. On a constant currency basis, recurring subscription and support revenues were $17.9 million. Service revenues increased 17.9% to $15.6 million compared with $13.2 million in the prior year period. On a constant currency basis, services revenues were $15.5 million. Gross profit was $14.9 million or 44.2% of net revenues compared with $13.5 million or 44.8% of net revenues in the prior year period. On a constant currency basis, gross profit was $14.6 million or 43.5% of net revenues. Cost of sales was $18.9 million or 55.8% of net revenues compared with $16.7 million or 55.3% of net revenues in the prior year period. On a constant currency basis, cost of sales was $18.9 million or 56.5% of net revenues. GAAP net loss attributable to NetSol for the 6 months totaled $2.1 million or $0.18 per diluted share compared with a GAAP net loss of $1.1 million or $0.09 per diluted share in the prior year period. On a constant currency basis, GAAP net loss attributable to NetSol was $2.5 million or $0.21 per diluted share. Non-GAAP EBITDA for the 6 months ended December 31, 2025, was a loss of $0.1 million compared with a non-GAAP EBITDA loss of $0.5 million for the prior year period. Turning to the balance sheet. Cash and cash equivalents were $18.1 million at December 31, 2025, compared with $17.4 million at June 30, 2025. Working capital was $26.4 million compared with $26.6 million and NetSol stockholders' equity was $35.9 million or $3.04 per share. For the first half of fiscal 2026, we delivered continued revenue growth across both recurring and services businesses while maintaining a solid balance sheet and liquidity position. I'll now hand over the call back to Najeeb.

Najeeb Ghauri, CEO

Thank you, Abubakr. Looking ahead, we remain confident in our ability to capitalize on opportunities across our markets. We will continue investing in our product portfolio, including AI-enabled capabilities across the Transcend platform while expanding our global footprint and enhancing our solutions to meet evolving client needs. Our focus on long-term customer relationships, supported by a strong pipeline of recurring and services engagements, positions us well for continued progress. With that context, we have increased our full year fiscal 2026 revenue growth guidance to nearly $73 million or better, supported by our current pipeline and continued investment in go-to-market initiatives and our unified AI-enabled Transcend platform. While macroeconomic and currency dynamics remain a consideration, our diversified business model, execution discipline, and resilient customer base provide a solid foundation for the remainder of the fiscal year. Overall, our first half performance reinforces our view that NetSol is well positioned to achieve our full year objectives and continue creating value for our customers and shareholders. With that, operator, please open the line for question and answers.

Operator, Operator

Our first question comes from Todd Felte with StoneX Group.

Todd Felte, Analyst

Congratulations on a great quarter. I think the $18.8 million may be an all-time record for quarterly revenue. So that's great to see. I wanted to ask about your margins. I know you had some recent hires and some travel expenses. But as those new hires get up to speed, do you expect continued margin improvement? And where do you think your margins will kind of stabilize out at?

Najeeb Ghauri, CEO

Thank you, Todd. Absolutely, we are anticipating improving margins in the coming quarters and the next fiscal year. As you rightly said, we are continuously investing in our growth strategy. It means travel, new employees, building new platforms, and so forth. So I think the gross margin will improve, absolutely. And I think I can have Naeem and Abu jump in to add further.

Naeem Ghauri, President

Yes, I'll just add a little bit more color. So essentially, the new hirings are primarily in the AI teams, Todd, and we see that continuing for a period. We are also incurring some expense on cross-training. So we have a very aggressive plan to cross-train our existing workforce across horizontally in every department from HR to software engineering and testing, accounting, and admin. So literally, we are touching every single business segment. So internally, we are very, very confident that within the next 6 months, we will have a major transformation Phase 1 completed, and we'll go on to more advanced training as we go forward in the rest of the calendar year.

Patti McGlasson, Senior Vice President, Legal and Corporate Affairs

Does that help?

Sardar Abubakr, CFO

I'd like to just share that.

Todd Felte, Analyst

Yes. While I got you, I was wanting to ask about the noncontrolling interest and how that is computed. I know that took a big chunk out of our earnings per share this quarter.

Najeeb Ghauri, CEO

You want to answer, Abu? Just talking about the Pakistan subsidiary, right?

Naeem Ghauri, President

Minority interest, yes.

Sardar Abubakr, CFO

Sure. So if I could, Todd, just go back to your previous question first, and then we'll come back to this one just to add some color. So to take on what Naj and Naeem said, we will continue to invest in the right areas that will propel our future growth. But margin improvement, both at a gross and at a net level is going to be important for our profitability story and our journey going forward. You probably will see just very quickly that our GP percentage of revenues this quarter versus the preceding quarter was up 48% as compared to 44.5%. Cost of sales was down. Similarly, this quarter was 55.5% compared to the equivalent quarter of 52%. And then EBITDA, which is an important metric, of course, clocked at about a 9% margin compared to a loss in the equivalent quarter last period. I think what gives me confidence, Todd, in addition to that is that our liquidity position is solid. The current ratio, but also our debt to equity, gives us an opportunity to continue to invest in exciting growth markets. I think we're at the intersection of both software, financial services, and mobility. Now coming to your second question on minority interest controlling. If I understood that question, you were saying that how is that computed?

Todd Felte, Analyst

That's correct.

Sardar Abubakr, CFO

If you could just mention that again.

Najeeb Ghauri, CEO

Yes. Yes.

Todd Felte, Analyst

Yes. Just how is it computed? I know that there was a nice profit for the Pakistani subsidiary, and I showed we took a $715,000 loss on that noncontrolling interest.

Sardar Abubakr, CFO

Yes. We follow the standard definitions applied in GAAP for noncontrolling interest. So the Pakistani subsidiary is owned majority, but there is a 30% minority interest, and we follow the standard definitions as per calculation for GAAP. Roger, if you want to add to that, you can feel free to add if I missed anything.

Roger Almond, Chief Accounting Officer

No, I think you have that correct. So Todd, if you look at our Pakistani entity, we own almost 70%, with 30% held by noncontrolling interest. Since they recorded a significant profit for the quarter or for the six months, that 30% of their profit will be allocated to the noncontrolling interest. All of their revenues will be included in our revenues and costs, and then the noncontrolling interest is calculated as a single figure at the bottom. We adhere to the GAAP process as Abu mentioned.

Todd Felte, Analyst

Okay. That's helpful. So basically, the better that the subsidiary does, it will add to your revenues. But if it's really profitable, one-third of that will have to be written off in the noncontrolling interest?

Roger Almond, Chief Accounting Officer

Correct.

Sardar Abubakr, CFO

So Todd, yes. So as a subsidiary and not an affiliate, we will consolidate all revenues and costs. But from the profit share, you're right. Any earnings are split on a 70-30 basis between the parent and minority interests.

Todd Felte, Analyst

Okay. That's helpful. And then finally, to allude to your comments about the strong financial position the company is in. As a shareholder, we see the stock still trading just barely above book value. Have you thought about allocating some of that $18 million in cash, a small amount to either a stock buyback or maybe a small dividend?

Roger Almond, Chief Accounting Officer

I think...

Sardar Abubakr, CFO

We can proceed.

Roger Almond, Chief Accounting Officer

Thank you for your question, Todd. We explored that a couple of years ago, and we remain open to considering the same approach. Once we reach a decision among the Board, we will follow up with you. We definitely want to see the stock price increase. I also want to thank you for visiting us a few months ago; it demonstrates your commitment and belief in our company. We truly appreciate your long-term perspective.

Todd Felte, Analyst

It was great to visit you.

Operator, Operator

We have no further questions at this time. Mr. Ghauri, I would now like to invite you to provide your closing remarks.

Najeeb Ghauri, CEO

Thank you for joining today's call. Sorry, Todd, do you want to come back?

Naeem Ghauri, President

Yes, I thought Todd wanted to come back. He's going back in the queue.

Najeeb Ghauri, CEO

Is he in the queue, operator?

Operator, Operator

Thank you for joining today's call. Sorry, Todd, do you want to come back? Yes, I thought Todd wanted to come back. He's going back in the queue. Is he in the queue, operator?

Najeeb Ghauri, CEO

I think it's okay. We're fine.

Operator, Operator

Okay. Yes.

Najeeb Ghauri, CEO

Well, thanks for joining the call today...

Operator, Operator

No, I'm sorry, he did jump back in.

Najeeb Ghauri, CEO

Okay.

Operator, Operator

Todd, your line is live.

Todd Felte, Analyst

Okay. I'm good with that. Again, congratulations on a great quarter, and I look forward to future success.

Najeeb Ghauri, CEO

And do come back again to Encino, California, Todd. Thank you for joining us today for your ongoing interest in NetSol. We look forward to updating you on our continued progress in the coming quarters. Have a nice day.

Operator, Operator

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.

Najeeb Ghauri, CEO

Thank you, operator.