NetSol Technologies Q3 2023 Earnings Call Transcript

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May 11, 2023

There are 7 speakers on the call.

Operator

Good morning. Welcome to NetSol Technologies Third Quarter 2023 Earnings Conference Call. On the call today are Najib Ghauri, Chairman and Chief Executive Officer Roger Almond, Chief Financial Officer and Betty McLaughlin, General Counsel. And Excluding the and also available separately on the company's website. I would now like to turn the conference over to Patti MacGlassen, who will provide the necessary cautions regarding the forward looking statements made by management during this call.

Operator

Please proceed.

Speaker 1

Good morning, everyone, and thank you for joining us. Following a review of the company's business highlights and financial results, and Company. 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. And Excluding the company's discussion, including any accompanying slides, may include forward looking statements reflecting management's current forecast of certain aspects of the company's future and our actual results may differ materially from those stated or implied.

Speaker 1

These forward looking statements of the company's Investors and SEC filings, including our annual report on Form 10 ks 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 of Investor Relations. Today contains a reconciliation of these non GAAP financial results to their most comparable GAAP measures. Finally, I would like to remind everyone of Investor Relations.

Speaker 1

This call will be recorded and made available for replay at www.netsalltech.com and via link available in today's press release. Executive Vice President. Now I'd like to turn the call over to Najeeb. Najeeb?

Speaker 2

Thank you, Patty, and good morning, everyone. It was a busy quarter here at NetSol, one in which we made a lot of progress driving key new initiatives. And Company. First, we are expanding our customer base with a focus on SaaS. 2nd, we're expanding in North America, which is a key new market focus for us that offers considerable opportunity to leverage our success in Asia and Europe and third, we are driving efficiencies in the business.

Speaker 2

In the Q3, we expanded our already robust customer base that includes some of the most Recognizable Names in the Global Leasing and Finance Industry, and we continue to strategically partner with entities that help us to better support our customers and accelerate our organic growth. We signed a multimillion dollar agreement with Kubota, a Japanese company relating to its operation in Australia. And Excluding the merger, we will deploy our NFS Ascent Retail Platform, which consists of the Ascent of Omnipoint of Sale and Ascend Contract Management System as well as selected NFS Digital Touchpoints, including self point of sale, mobile point of sale and mobile account. Also in the Q3, we went live with Flex, our API first and cloud based calculation engine for Hidoc Finance, a business finance provider in the United States. We are especially excited about this agreement of Flex is the first product that we've launched as a part of NetSol's new Apex Now marketplace, specifically targeting the global credit, of Finance and this Industry.

Speaker 2

So we are encouraged to see this product getting some early traction. And Company. On the partnership side, we extended our partnership with Amazon Web Services or AWS and became an API gateway delivery partner, allowing us to provide more robust and reliable solutions to our clients by enabling us to build, secure and Scale APIs like Flex. We also signed a teaming agreement with Digital Intelligent Systems, allowing us to leverage their expertise and large resource pool of over 5,000 U. S.-based engineers and Company.

Speaker 2

We are pleased to announce that our growing U. S. Presence and jointly undertake large enterprise grade programs for existing and new U. S. Clients.

Speaker 2

Partnerships like these are crucial part of our business and allow us to offer better products and more efficient service to our customers.

Speaker 3

Of the Company.

Speaker 2

At the center of our agreements and partnerships is our suite of industry leading product offerings. Of our core products consist of the next generation NFS Ascent platform, a highly adaptive retail and Wholesale platform for the global finance and leasing industry available on the cloud via SaaS subscription based pricing. And Advanced Digital is a combination of our core strengths, domain and technology providing digital Transformation Solutions like self point of sale and mobile point of sale to augment and enhance of our customers' ecosystems. OTOZ is a fully digital white label platform for lease, finance and Cash Transactions that delivers a frictionless customer experience. In addition to these products, We recently launched ApexNow, the 1st marketplace offering solution built on API of the company's first strategy developed specifically for the global credit, finance and leasing industry.

Speaker 2

Of our first product to be launched as a part of this marketplace, Flex is an instant cloud based calculation engine for accurate contract lifecycle calculations. Subsequent to the quarter, we also launched QubeX, of the company, an API library that enables companies to standardize all their API integration procedures across multiple API services through a single integration and we are actively developing new products for launch of the CapExNow umbrella. Finally, in October 2022, we entered of the company's business, a partnership with Amazon Web Services or AWS to offer our customers innovative cloud solution of Services at scale with highly skilled AWS resources. In the Q3, we extended our partnership of the company's business, which will support the development and implementation of products in our Apex Now marketplace. Our products are the driving force behind our growth of Global Company with a robust geographic presence and deep experience in our field.

Speaker 2

Of Corporate and Global Services. Over the course of 40 years, NetSol has established a strong global presence, particularly in APAC and Europe. We have become synonymous with innovative, state of the art business services and enterprise solutions that supports the everyday operations of some of the largest and most recognizable companies in the world. While we are well known in our established markets, North America remains largely untapped for NetSol. The U.

Speaker 2

S. Represents a very exciting opportunity for us, and we are taking steps to position Nestle as a leading provider of leasing and finance software solution in this region. Already, we managed to achieve a of the company's business. Year over year sales growth driven by a multimillion dollar contract with a Tier 1 automotive provider, AutoNation and our autos platform is currently live in 53 minuteianywhere dealerships across the U. S,

Speaker 3

and Company. As

Speaker 2

I mentioned last quarter, we are also making good progress of the company's leadership team, establishing a client support facility in Austin, Texas, which will accommodate all our sales and support staff based in North America and facilitate our growing customer base and we are actively identifying and evaluating M and A opportunities in this region to further accelerate our organic growth. We believe the U. S. And North America represents a tremendous opportunity for NetSol, of Investor Relations, especially as it pertains to our SaaS and cloud based offerings that generate valuable of Reliable recurring revenues for our business and we are intently focused on building our presence in this region going forward. Speaking more on our SaaS and cloud based offerings, we are currently in a very exciting part of our growth as we evolve of Technology and Technology and Technology.

Speaker 2

Recurring revenue is a very attractive and Reliable Model for our business with sequential growth over the past 3 quarters indicating a shifting demand of subscription based products in place of our traditional licensing model. The benefits of shifting to a SaaS model are plentiful, of Corporate and Financial Services, both for the customer and for NetSol. As I mentioned, SaaS and cloud based products drive high margin recurring revenue for our business and shifting to a SaaS model also increases our customers' access to industry specific of generative AI or artificial intelligence learning technology through our partnership with AWS and others like it. Of the company. Consequently, we are implementing more and more out of the box products on a pure SaaS model and deployed over the cloud.

Speaker 3

And Executive Vice President of Investor Relations.

Speaker 2

We are projecting over $25,000,000 in subscription and support revenue for the full fiscal year 2023, and we expect the number to increase both as we continue our evolution to a SaaS model and as demand for SaaS and cloud based products of Excluding the impact of the company's revenue growth. Because of this shift to a pure SaaS model, our products and services will require significantly less manpower to deliver the same superior customer support and customization of Excluding the company's financial results, we are known for and we are adjusting our business accordingly. Last quarter, we announced cost reduction initiative, which we estimated would generate more than $4,000,000 in savings across our business. To date, we have reduced our headcount by 10% and we are targeting a total headcount reduction of up to 25% with significant total savings that we expect to have and Executive Vice President of Finance and Investor Relations. We now expect to reduce of Global Services.

Speaker 2

Our total cost by over $7,000,000 and our plan is to allocate more capital to our most attractive Growth Markets, namely our expansion into the North American markets and the development of additional SaaS and Cloud based products that further strengthen our already robust offerings. This is an exciting time for NetSol of Investor Relations. As we significantly shift our business model and tap into new markets that provide us with a tremendous opportunity Exponentially Grow Our Business. I will now turn the call over to Raja Amund, our CFO, who will walk us through our financials for the quarter. Go ahead, Roger.

Speaker 4

Thank you, Najeeb. Our total net revenues for the Q3 of fiscal 2023 of Excluding the company's earnings release, we are pleased to report that we

Speaker 2

are

Speaker 4

of Consumer Cellular Services, net revenues were $14,100,000 License fees were $2,000,000 compared with $1,600,000 in the prior year period and of Excluding the company's revenue,

Speaker 3

we are now in the range of $2,100,000

Speaker 4

on a constant currency basis. Recurring revenue or subscription support revenues were 6,700,000 of the company's business, and we are pleased

Speaker 3

to report that we

Speaker 4

will be conducting a reconciliation of our financial results. On a constant currency basis, recurring revenues were 6,800,000 of Corporate and Financial Services. Total services revenue were $4,900,000 compared with $6,600,000 in the prior year period. Of the company. The decrease in services revenue is related to an overall decrease in services provided for ongoing implementations and additional change requests.

Speaker 4

On a constant currency basis, total services revenue were 5,200,000 of Services revenues derived from services provided to both current customers as well as services provided to new customers as part of the implementation process. And Company. Total cost of revenues was $8,800,000 for the Q3 compared to $8,900,000 in the Q3 of fiscal year 2022. And Excluding the impact of the of Q3 was $4,700,000 or 34.8 percent of net revenues of the company's Investors, Inc. And $5,800,000 or 39.4 percent of net revenues in the Q3 of fiscal 2022.

Speaker 4

Of the company. On a constant currency basis, gross profit was $2,400,000 Operating expenses for the 3rd quarter were of $5,600,000 or 41.7 percent of sales compared to $6,400,000 or 43 percent of sales in the same period last year. And Excluding the impact of the company's earnings release, we expect to be approximately $1,000,000 or 48.7 percent of sales. And Company. Turning to our profitability metrics, our GAAP net income attributable to net sold for the Q3 fiscal 2023 totaled $2,500,000 or $0.23 per diluted share compared with a GAAP net loss of 278,000 of Corporate and Regulatory Services.

Speaker 4

On a constant currency basis, our total net income attributable to net sold totaled of $1,200,000 or $0.11 per diluted share. As always, it's important to point and Company. The company's net income this quarter was a large gain of $5,400,000 on foreign currency exchange transactions

Speaker 3

of Capital

Speaker 4

Markets, compared to a gain of approximately $500,000 in the Q3 of last year. On a constant currency basis, we realized a gain of $7,900,000 on foreign currency of Exchange Transactions. Because we operate in several geographical regions, a significant portion of our business is conducted in currencies other than the U. S. Dollar.

Speaker 4

And Company. A decrease in the value of the U. S. Dollar compared to foreign currency exchange rates generally has the effect of increasing our revenues, of Corporate and Corporate, but it also increases our expenses denominated in currencies other than the U. S.

Speaker 4

Dollar. Similarly, as the U. S. Dollar gains strength relative to foreign currency of Exchange Rate. It tends to reduce our revenues, but it also reduces our expenses denominated in currencies other than the U.

Speaker 4

S. Dollar. We plan our business accordingly by deploying 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 of Q3.

Speaker 4

Adjusted EBITDA for the Q3 fiscal 2023 was $3,300,000 or $0.29 per diluted share of GAAP adjusted EBITDA of $359,000 or $0.03 per diluted share in the Q3 of last year. And Executive Vice President. Please see the reconciliation schedules contained in our earnings release for our revised calculations of adjusted EBITDA for the quarters ended March 31, 2023, 2022. Turning to our balance sheet. At quarter end, we had of Cash and cash equivalents of approximately $15,300,000 or approximately $1.35 per diluted common share.

Speaker 4

Of Investor Relations. Total stockholders' equity at March 31, 2023 was $41,000,000 or $3.63 per share.

Speaker 3

And Executive Vice President.

Speaker 4

That concludes my prepared remarks. I'll now turn the call back over to Najeeb.

Speaker 2

Thank you, Roger. In summary, and we have a lot to be excited about for this business. We are expanding into perhaps the most vibrant and untapped market in the world in North America and specifically in the United States. We're also evolving towards a pure SaaS model that allows of Excluding the impact of our revenue growth, we expect to generate higher margin recurring revenues with less manpower and more support and customization for our customers. And we are strategically reducing our costs so that we can allocate capital to the parts of our business that make all of our of Exane.

Speaker 2

I'm very encouraged by what we are seeing on the horizon for NetSol and I look forward of Investor Relations. With that, I'd like to now

Speaker 3

and

Operator

Executive Vice President of Investor Relations. Please go ahead.

Speaker 5

Hi, Najeeb, Roger. Great to see the progress on the quarter. Nice to see the improvements there. Just had a couple of questions. I know in the last 2 years, we've announced contracts with Yamaha North America, BMW MINI Cooper, of AutoNation, IKEA and a lot of these other household names.

Speaker 5

We haven't really gotten kind of a ballpark revenue of Exane. Are these contracts with these household names, do they produce over $1,000,000 in revenue for us each year? Or is it of Smaller or can you kind of give us some color to what these contracts provide revenue wise?

Speaker 2

Yes. Thank you, Todd. You're right. These contracts, including AutoNation Yamaha, they of At least $1,000,000 projected revenue each year. And of course, these are own, as you know, very of Excluding the company's name, we believe there is a bigger opportunity to grow with them as our history with some of the previous names or bigger names in the auto sector.

Speaker 2

We've done so well so many years, but I believe in the U. S. These names are Perfect for our pivot in the SaaS and cloud and mobility. So I'm pretty confident that the relationships will of as we continue to deliver the first phases of our contracts.

Speaker 5

Okay. And also in the past, you would always give kind of a range of the backlog. I think we are up to of over $200,000,000 maybe even $250,000,000 in backlog that you had announced on the last quarterly call. Can you give us a ballpark range of our backlog now?

Speaker 2

The reason, Todd, we chose not to give a specific number because This industry has changed a lot in last even recently few months. I won't talk of Capital Markets. The last few months have been different. The world has changed a lot in many, many ways, given all the macro challenges and the customers of potential new customer tend to take much longer time to make a decision. So we chose to focus on of the strategy, which is the areas we are now entering, particularly our aim to

Speaker 3

and Company. They can be much stronger player

Speaker 2

in the U. S. Market. So I think what is important is each quarter what we deliver or we report and Company. And it creates more anxiety for the management if we give them backlog number and then we can close them in the respective quarter, It creates more pressure, I think, unnecessary.

Speaker 2

So I believe it is still a healthy backlog. We have lots of deals of the company's business. I believe, you know, we don't wait 1 minute when we have announced a material new contract. But more importantly, the company is really transforming, becoming a FinTech and really focused on SaaS, cloud mobility. And Company.

Speaker 2

And I believe the U. S. Is the market for these new directions for the company. I think I'm pretty confident. I'm very excited and Company.

Speaker 2

And optimistic about our future, especially in the U. S. Because that's where we are very low in our market of Excluding the impact of the U. S. Is very big field for us wide open to grab bigger market of Investor Relations.

Speaker 5

Okay. That's great to hear. And I know that you had talked about during the last quarterly call, the lot of these of Credit Suisse. Headcount reductions and cost savings really taking effect into the latter part of this year to where of Exane. We might turn profitable from an operating standpoint.

Speaker 5

I know we have a large currency gain, which is great to see. Is there any update on if we can achieve the operating profitability in the latter half of this year?

Speaker 2

Yes, Todd. This transformation to SaaS and Cloud and Mobility has really given us some of the company. Don't rely too much on the license transaction, which obviously takes a lot of of Corporate and Corporate. Yes, we make money, while they are very long term decision making cycles of the customer, but also it takes a lot of manpower to support them. So we have come to a conclusion, a resolution rather to cut down of the headcount by at least 25% in totality.

Speaker 2

So we started with 10% in this current quarter. We believe in at least next of Q3, we must have achieved 25% total headcount. That would bring a substantial reduction of overhead because now you're focusing on of Quickplay that is SaaS model solution, which is ready to go. It won't require too much of the back office of Personnel Engineers, but these Flex products and those new solutions are mobility, for example, you can see We are up to 53 dealership in many anywhere and what kind of stops us to get into MBW in the U. S.

Speaker 2

They have 400 Chips. Those kind of verticals and the new areas will keep our cost much lower than what we've been doing because we've been supporting large implementation all these of Daimler and BMW, as you know all the names, but we have pivoted and that way we will have a leaner organization, Much lower expenses, operating expenses and of course improve our operating profit and net income and of course, cash flow.

Speaker 5

Okay. That's great to hear. And then my final question, I can hop back in the queue, is just it was nice of Credit Suisse. The revenues even before the currency adjustment, they were the highest since June of last year. It looks like the subscription model is kicking of Exane.

Speaker 5

And do we expect to see continued smooth curve up with revenues increasing every quarter or is it going to be

Speaker 2

of I think this is the whole idea, Todd, is to avoid lumpiness of quarter sales by getting into SaaS and Mobility and solution which is really easy to implement and predictable. So I'm very confident that we can show quarterly growth from quarter to quarter and sequentially as well as the year to year. So I'm Pretty positive that there's so much happening here and all the new things we talked about in our prepared remarks that I think the direction is clear. We have to I mean we did very well with the license model. We need to continue to get the RFPs working on the license deal, but The focus really is the U.

Speaker 2

S. Market, organic growth, partnerships, relationships, lots going on now than of 6 months ago. So I'm optimistic about continuous growth sequentially and year over year.

Speaker 5

Okay. Well, congratulations on a good quarter. I look forward to future announcements and showcase the success of your company. And thank you very much for taking my of Exanez.

Speaker 2

Thank you, Todd.

Operator

The next question comes from the line of Karl Brooks with Pine Creek Capital. Please go ahead.

Speaker 6

Hey, guys. Thanks for taking my question. Just have a quick one here. Can you provide a bit more color around your market share in Asia and Europe?

Speaker 2

Yes. Asia, if I focus just in China, which is our biggest market in terms of revenue, We are by far the majority leader in terms of market share in China because we boast of the maximum number of customers in our space. Competitors are few, but they have a tiny share compared to us. So we could be 70%, 80% of Global Banking. In this space, leasing the finance space in China, overall, APAC is still a leader because our dominance is in China, of Japan, Australia, New Zealand, Thailand, you name it, almost 12 countries.

Speaker 2

So we believe we have again of Global Markets. Overall, FX, the market share is the majority. Europe, we've been doing quite well. It's hard to see some traction in the recent months quarters. There are few companies, handful of companies in our business, which is, as you know, very niche business.

Speaker 2

In Europe, we are doing quite stable, but in the U. S, we have the biggest opportunity to grab bigger share in the coming years.

Speaker 6

Got it. Great. Thanks, guys.

Speaker 2

Thank

Operator

at this time, this concludes our question and answer session. If your question was not addressed during the Q and A session, please contact NetSol Investor Relations team by mailing them at netzlimsinvestor atrelations.com or by calling them at 949-574-3860. I'd now like to turn the conference back over to Mr. Gauri for his closing remarks. Please go ahead.

Speaker 2

Thank you for joining us today. I especially I'd like to thank our investors for the continued support, our loyal customers and our dedicated employees worldwide for their ongoing contributions.

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NetSol Technologies Q3 2023
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