NetSol Technologies, Inc.
Q1 2022 Earnings Call Transcript

Published: 11 Nov 2021

[Operator:]

Good afternoon. Welcome to the NETSOL Technologies Fiscal First Quarter 2022 Earnings Conference Call. On the call today are Najeeb Ghauri, Chairman and Chief Executive Officer; Naeem Ghauri, President and OTOZ CEO; Roger Almond, Chief Financial Officer; Patti McGlasson, General Counsel. I would now like to turn the call over to Patti McGlasson who will provide the necessary cautions regarding the forward-looking statements made by management during this call. Please proceed.

[Patti McGlasson:]

Good afternoon, 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 their most comparable GAAP measures. Additionally the company had posted a presentation to accompany the remarks we plan to make on today’s call in the Investor Section of our corporate website. 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 would like to turn the call over to Najeeb. Najeeb?

[Najeeb Ghauri:]

Thank you, Patti. And good afternoon everyone. In the first quarter, we capitalized on the strong momentum built over the course of the past year and are firmly positioned to achieve our goals, growth goals for fiscal 2022. Within our core business, the pipeline and mix of opportunities remain robust, particularly in our European and North American growth markets, giving us confidence in our ability to drive additional content signings over the coming months. Within our more venture-based operations, the rollout of the auto digital platform in partnership with MINI Anywhere has been a resounding early success. With 10 dealerships subscribed and additional states going online in the near future, we are encouraged by the initial response and total opportunity. Across the company, we have begun a deliberate process to conservatively begin returning our employees to our global offices. In the coming months, we are expecting to have 40% to 50% of our employees back in our Lahore campus or technology campus, which is home to the majority of our workforce and is at the heart of what technology and operations. Moreover, since the start of the fiscal year, we have increased our headcount by over 30 employees, mostly stationed in Lahore to support additional implementation work and innovation initiatives. We've also made several strategic hires across our global operations to support our increased sales efforts. We intend to make this year a return to meaningful growth. And we are confident that the investments we'll be making in our leadership, workforce, technology and expanded sales efforts will lead to outsized returns in the coming quarters. With that 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:]

Thanks, Najeeb. Turning to our fiscal first quarter 2022 results for the period ended September 30, our total net revenues for the first quarter 2022 were $13.4 million compared with $12.6 million in the prior-year period. The increase in total net revenues was primarily driven by an increase in subscription and support revenues of $1.1 million, slightly offset by decrease in total services revenue of $292,000. Total subscription and support revenues in Q1 were $6.2 million compared to $5.2 million in the prior-year period. The increase in total subscription and support revenues for the quarter was a result of several customers who went live with our product in fiscal 2021. We anticipate subscription and support revenue to gradually increase as we implement both our NFS legacy product and NFS Ascent. Total services revenue for the quarter was $7.2 million compared to $7.5 million in the prior year period. The decrease in services revenue for the quarter was a result of services being decreased for completed implementations, which was offset by an increase in service revenue for an ongoing customer implementation in China. Services revenue is derived from services provided to both current customers as well as services provided to new customers as part of the implementation process. Total cost of revenues was $8 million for the first quarter, an increase of $1.7 million from $6.3 million for the first quarter 2021. The increase in cost of sales for the quarter were primarily due to increases in salaries and consultancies of $1.1 million, travel costs of $110,000, depreciation of $58,000 and other costs of $407,000. Gross profit for the first quarter of fiscal 2022 was $5.4 million or 40.6% of net revenues compared to $6.4 million or 50.5% in net revenues in the first quarter fiscal 2021. The decrease in gross profit for the quarter was primarily due to increases in cost of revenue of $1.7 million, offset by $773,000 increase in revenue. Operating expenses for the first quarter increased 13.8% to $6.1 million or 45.3% of sales from $5.3 million or 42.3% of sales in the same period last year. The increase in operating expenses for the quarter was primarily due to increases in general and administrative and research and development costs. Turning to our profitability metrics. Our net loss from operations was $640,000 for the first quarter, a decrease in net income from operations of $1 million in Q1 last year. Our GAAP net income attributable to NETSOL for the first quarter of fiscal 2022 totaled $188,000 or $0.02 per diluted share. This compares with GAAP net income of $718,000 or $0.06 per diluted share in the first quarter last year. The decrease in GAAP net income attributable to NETSOL for the quarter was primarily a result of cost to support revenues increasing at a greater rate than increases in revenues. As I've mentioned on previous calls, it's important to point out that included in our net income this quarter was a gain of $1.3 million on foreign currency exchange transactions, compared to a gain of $296,000 in Q1 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. We plan our business accordingly by developing additional resources to areas of expansion, while continuing to monitor our overall expenditures given the economic uncertainties of our target markets. Moving to our non-GAAP metrics, our non-GAAP adjusted EBITDA for the first quarter of fiscal 2022 totaled $770,000 or $0.07 per diluted share compared with non-GAAP adjusted EBITDA of $1.6 million or $0.14 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 fiscal quarter ended September 30, 2021. Turning to our balance sheet. At the quarter-end, we had cash and cash equivalents of approximately $27 million, or approximately $2.40 per diluted common share, which was down from $33.7 million or approximately $2.93 per diluted common share at June 30, 2021. On July 30, 2020, NETSOL's Board of Directors approved a stock repurchase program that authorized potential repurchases of up to 2 million of its common stock over a six-month period. All shares permitted to be purchased under the July 2020 plan were purchased during the plan's original date and prior to the conclusion of extension of the plan. On May 21, 2021, the Board of Directors authorized an additional repurchase plan of up to 2 million worth of shares of common stock through November 20, 2021. Under the program, the company may repurchase its common stock in the open market from time to time in amounts at prices and at such times that the company deems appropriate, subject to market conditions and federal and state laws governing such transactions. NETSOL expects to fund the repurchase with its existing cash balance and cash generated from operations. As of September 30, 2021, the company had repurchased 691,528 shares of its common stock at an aggregate value of $2,464,887. One final note before I hand the call back over to Najeeb is regarding our financial outlook for fiscal year ending June 30, 2022. The company expects total revenues to increase by at least 10% and subscription and support or recurring revenues to increase by at least 20%. The company's guidance is based on existing contracts and recurring revenue from its current customer base, performance results tracked through October of 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:]

Thank you, Roger. I will now provide updates within the major components of our growth strategy. Our strong financial performance during the regular quarter, this quarter was highlighted by an increase in recurring revenues of 10% sequentially and 20% over the prior year respectively. At an annualized rate, this quarter's performance equates to a nearly $25 million annualized run rate, which we expect to improve throughout the balance of the year. As we conservatively began the process of welcoming employees back to work across our global footprint, we expect a return to sales growth to support our increased business activity. Our cash division remains strong, providing additional resources to support our core business as well as strategic investment in high-return long-term opportunities, including our work in the OTOZ Innovation Lab. With these factors in consideration, as Roger just noted, we are reiterating our full-year revenue outlook of 10% top-end growth and 20% subscription growth revenue throughout the balance of the year. Moving on to the second component of our strategy. We are innovating in new areas and looking to create partnerships with technology and personnel, which can be a major benefit to our other organization as well as our own. To this end, I'd like to take some time to provide a brief update on our progress within the OTOZ Innovation Lab. The most visible project within OTOZ in recent months has undoubtedly been our partnership with MINI Anywhere. As a reminder, OTOZ has been working with BMW Group Financial Services through its key brand MINI Anywhere to provide MINI USA customers with a fully digital shopping experience, empowering their marketing strategies and creating a new automated sales channel for dealerships and lenders. The OTOZ digital retail platform for MINI Anywhere has recently been featured across major publications, including Newsweek, Automotive News and ABC News. Since launch in late May, the new platform has quickly gained traction. As at quarter-end, MINI Anywhere was live with eight MINI dealerships. And as of October, we have grown to the number two chain including onboarding of two of the biggest dealer groups in the US. In just a few short months, we have now captured 50% of all California MINI dealerships and we'll be looking to build on this early momentum going forward. In the coming months, we are expecting enrollments from dealers in both Florida and Texas, with several other states following suit. The success of this program can be attributed to several factors, and I'd like to share one data point we believe to be the most telling. Through the fiscal first quarter, we've been able to generate a blended lead conversion ratio approximately 1

[Operator:]

I'd now like to turn the call back over to Mr. Ghauri for his closing remarks.

[Najeeb Ghauri:]

Thank you for joining us today. I especially want to thank you, our investors, for the continued support, our loyal customers and our dedicated employees for their ongoing contribution. We look forward to appraising you on our next call. Thank you.

[Operator:]

Thank you for joining us today for NETSOL's fiscal first quarter 2022 earnings call. You may now disconnect.