NetSol Technologies Q4 2023 Earnings Call Transcript

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September 22, 2023

There are 6 speakers on the call.

Operator

Welcome to NetSol Technologies 4th Quarter and Year End 2023 Earnings Conference Call. On the call today are Najeeb Ghauri, Chairman and Chief Executive Officer Roger Almond, Chief Financial Officer Naeem Ghauri, Chairman and President and Patti McGlasson, General Counsel. I would now like to turn the call over to Patti MacGlasson, who will provide the necessary cautions regarding the forward looking statements made by management during this call. Patti, 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, 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.

Speaker 1

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 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 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.netsalltech.com and via link available in today's press release. Now, I'd like to turn the call over to Najeeb.

Speaker 1

Najeeb?

Speaker 2

Thank you, Perry, and good morning, everyone. From a financial perspective, the Q4 came in below our expectations. That said, I'm proud of the progress we made in the year and specifically the Q4 on the 3 core drivers of our growth plan. Number 1, transition to SaaS or Software as a Service model and developing products that enhance the strategy 2, our cost reduction across our company and the 3rd, expansion into the North American market in the U. S.

Speaker 2

Specialty. Now let's drill down on each of these. Beginning nearly 2 years ago, NetSol embarked on a journey to transition our license income to recurring subscription or SaaS based revenue for all enterprise resource planning and other solutions within the automotive asset Mobility Markets. We are seeing positive sequential year over year growth in our subscription and support revenues. And I'm especially pleased to report that our full year subscription and support revenues exceeded our stated targets of $25,000,000 Currently, a large portion of our revenue is recurring and our mobility solutions are now 100% SaaS or cloud based.

Speaker 2

We continue to seek interest from existing clients in converting SaaS pricing and with new clients buying SaaS and cloud based solutions. Mainly our flagship NFS Ascent product, our recurring subscription and support revenues are positioned for continued growth. Ascend is our flagship SaaS based enterprise solution designed for end to end management of the entire contract lifecycle. Our customers deploy the solution to efficiently manage what are often numerous complex and different differing leasing contracts. Augmenting our Ascent solution is our Apex Now marketplace of API first application that provide essential customizability, application like Flex, our API based calculation engine and Hubex, which allows with efficient and streamlined integration of API applications with a developer friendly plug and play system.

Speaker 2

In the Q4, we implemented Flex with a major business finance provider in the United Kingdom to offer an online quotation tool providing fast and accurate payments and rates for their customers. We anticipate adoption of these applications by both new and existing customers as we continue to expand the Apex Now marketplace and increase the customizability of our products to meet the specific needs of virtually any customer. Our auto solution continues to see traction in the U. S. As well specifically with its adoption in MINI Anywhere Dealerships, a subsidiary of BMW Group throughout the region.

Speaker 2

To date, OTOZ is live in 60 Mini Anywhere dealerships across 36 U. S. States. We're also strengthening our partnership with Amazon Web Services or AWS through numerous recognitions and accreditations that establish Nestle as a premier partner committed to designing, building and maintaining secure, reliable and efficient cloud architectures, which relate specifically to our SaaS offerings. As anticipated, our transition to a SaaS based model has had a short term impact on our cash flows, but the nature of SaaS pricing is such that we will be recognizing more consistent, predictable higher margin revenues as the revenue mix evolves over time We expect our cash flows to return to an eventually exceed historic level as we continue to drive this transition, and we believe that over the next 18 months, a consistently growing percentage of our revenue should be recurring.

Speaker 2

Another impact of the SaaS based model is that it requires significantly less manpower to provide the level of support for our technology that our traditional licensing model had historically demanded. As a result, in the Q2 of 2023, we began implementing company wide cost reduction initiatives that includes the reduction of our overall headcount by what we expect to be approximately 300 after the period of severance required, the local laws that extend into the 1st and second quarters of fiscal 2024. We expect further cost reduction allowing us to better allocate capital to growing higher margin parts of our business and Drive to Profitability. Lastly, we remain intently focused on expanding into the North American markets. We have established a facility in Austin, Texas, a bird yawning technology hub in addition to our corporate headquarters in in Encino, California, and we are taking the time to staff the office, the most qualified individuals to help us efficiently grow our business in the United States.

Speaker 2

Our established markets remain strong. NetSol is a leading provider of global leasing software solution in the Asia Pacific region, and we have a presence throughout Europe with room for additional growth. These established presences across key geographic regions provide us with a strong Industry's reputation, a proven portfolio of contracts with Tier 1 businesses, and a pipeline that continues to be robust with several potential licensing deals in the works. Despite this progress, I want to be clear that we are not satisfied with our results, but We are confident that the pieces are in place to generate long term growth and positive outcomes for our business. Based on our healthy pipeline of opportunities, we are targeting $61,000,000 to $63,000,000 in revenue for fiscal 2024.

Speaker 2

This would be an approximate 16% to 20% growth revenue growth in this fiscal year. With that, I'll now turn the call over to Roger Almond, our CFO, to go over our Q4 and full year financial results. Roger?

Speaker 3

Thanks, Najeeb. Our total net revenues for the Q4 of fiscal 2023 were $13,800,000 compared with $13,500,000 in the prior year period. On a constant currency basis, net revenues were 14,000,000 For the full year 2023, total net revenues were $52,400,000 compared to 57,300,000 in the full year 2022. On a constant currency basis, total net revenues were $54,700,000 License fees were approximately $21,000 compared with $952,000 in the prior year period and the same on a constant currency basis. For the full year 2023 license fees were $2,300,000 compared with $4,500,000 in the full year 2022.

Speaker 3

On a constant currency basis, license fees were $2,400,000 The decrease in license fees is primarily related to a decrease in licensing contracts compared with the prior year periods. Recurring revenue or subscription and support revenues for the Q4 were $6,800,000 compared with $6,100,000 in the prior year period. On a constant currency basis, recurring revenues were $6,900,000 For the full year 2023, recurring revenues were $26,000,000 compared to $28,300,000 in the full year 2022. Full year 2023 recurring revenue on a constant currency basis was 26,700,000 The decrease in the full year recurring revenue is related to a one time catch up in support revenue of approximately $3,500,000 in fiscal year 2022. As Najeeb mentioned, we anticipate these fees to gradually increase as we implement both our NFS legacy products and NFS Ascent.

Speaker 3

Total services revenue for the Q4 was $7,000,000 compared with $6,500,000 in the prior year period. On a constant currency basis, total services revenue was $7,100,000 For the full year 2023, Total services revenues were $24,100,000 compared to $24,400,000 in the prior year period. On a constant currency basis, full year 2023 total services revenues were $25,600,000 The increase in services revenues on a constant currency basis is primarily due to the increase in change requests, enhancements and reimbursable costs. Total cost of revenue was $9,000,000 for the Q4 compared to $8,700,000 in the quarter of fiscal year 2022. On a constant currency basis, total cost of revenues was $11,600,000 For the full year 2023 total cost of revenues was $35,500,000 compared to $33,500,000 in the full year 2022.

Speaker 3

On a constant currency basis, total cost of revenues was $45,500,000 Gross profit for the Q4 of fiscal 20 $23,000,000 was $4,800,000 or 35 percent of net revenues, consistent with $4,800,000 or 35.6 percent of net revenues in the prior year Period. On a constant currency basis, gross profit was $2,400,000 For the full year 2023, gross profit was 16 point $9,000,000 or 32.3 percent of net revenues compared to $23,700,000 or 41.5 percent of net revenues for the full year 2020 On a constant currency basis, gross profit was $9,200,000 The decrease in full year gross profit is primarily related to a combination of decreased net revenues and increases in cost of revenues. Operating expenses for the Q4 were $7,700,000 or 56% of sales compared to $6,400,000 or 47 percent of sales in the same period last year. On a constant currency basis, operating expense for the 4th quarter with $9,000,000 or 64 percent of sales. Full year 2023 operating expenses were $25,700,000 or 49% of sales compared to $24,800,000 or 43.3 percent of sales in full year 2022.

Speaker 3

On a constant currency basis, operating expenses were $30,400,000 or 55.7 percent of sales. Turning to our profitability metrics, our GAAP net loss attributable to NetSol for the Q4 fiscal 2023 totaled $5,000,000 or a loss of $0.45 per diluted share compared with a GAAP net loss of $2,200,000 or a loss of $0.19 per diluted share in the Q4 of last year. On a constant currency basis, our net loss attributable to NetSol totaled $7,800,000 or $0.69 per diluted share. GAAP loss Attributable to net sold for the full year ended June 30, 2023 was $5,200,000 or a loss of $0.46 per diluted share compared to a loss of $851,000 or $0.08 per diluted share in the prior year period. On a constant currency basis, net loss Tributable to NetSol is $12,200,000 or $1.09 per diluted share.

Speaker 3

As always, it's important to point out that included in our net loss this quarter included a loss of $610,000 on foreign currency exchange transactions compared to a gain of approximately $1,600,000 in the Q4 of last year. On a constant currency basis, we realized a loss of $1,200,000 on foreign currency exchange transactions. For the full year 2023, our net loss included a $6,700,000 gain on foreign currency exchange transactions compared to a 4,300,000 dollar gain in the full year 2022. On a constant currency basis, we realized a gain of $9,400,000 Because we operate in several geographical regions, a significant portion of our business is conducted in currencies other than the U. S.

Speaker 3

Dollar. A decrease in the value of the U. S. 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 U. S.

Speaker 3

Dollar. Similarly, as the U. S. 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 U. S.

Speaker 3

Dollar. Moving to our non GAAP metrics. Non GAAP adjusted EBITDA for the Q4 fiscal 2023 was a loss of $4,200,000 or $0.37 per diluted share compared with non GAAP adjusted EBITDA loss of 1,400,000 for the quarter of last year. Non GAAP adjusted EBITDA for the full year ended June 30, 2023 with a loss of $2,300,000 compared to an adjusted EBITDA of $1,800,000 for the full year ended June 30, 2022. Please see the reconciliation schedules contained in our earnings release for our revised calculations of adjusted EBITDA for the quarters years ended June 30, 2023, 2022.

Speaker 3

Turning to our balance sheet. At quarter end, we had cash and cash equivalents of approximately $15,500,000 or approximately $1.38 per diluted common share. Total net sole stockholders' equity at June 30, 2023 was $36,800,000 or $3.24 per share. That concludes my prepared remarks. I'll now turn the call back over to Najeeb.

Speaker 3

Najeeb?

Speaker 2

Thank you, Roger. As I said before, we are not satisfied with our current results and we believe that we have a plan and the pieces and place to change that for a long term. Our transition to SaaS based revenues continues to be underway and as more and more customers either transition to SaaS based pricing or enter into the new SaaS based pricing contracts, We will begin to see the impact of consistent recurring revenues on our financial results. Moreover, our comprehensive and highly customizable product portfolio allows us to meet the needs of virtually any customer. With established market presences in Asia and Europe and with exciting new opportunities in North America, We believe that we are positioned for long term sustainable growth and positive results.

Speaker 2

With the pieces coming into place, we are now focusing our time, energy and patience on the execution of this strategy. With that, I would now like to open the call for questions. Operator?

Operator

Thank you. At this time, we'll be conducting a question and answer session. Thank you. Our first question is from the line of Kieran Lewis with Yellow Piper Capital. Please proceed with your question.

Speaker 4

Hey guys, thanks for taking the question. You spoke about the Apex Now marketplace and specifically the Flex and Cubix applications. I was wondering if you could elaborate on this marketplace and how these applications tie into your other product offerings such as NFS Ascent?

Operator

Please proceed with your question.

Speaker 4

Hey, guys. So I was just wondering about the ApexNow Marketplace, you specifically mentioned the Flex and Cubix applications. Could you elaborate on that marketplace and how these applications tie into your other product offerings, such as NFS Ascent?

Speaker 5

Want me to jump in? I'll answer that. Your question is whether our Epic's Marketplace Epic's Marketplace can also Interface into other products other than Ascent?

Speaker 4

Yes, partially. Just some general color on the marketplace around those applications as well.

Speaker 5

Yes. So, okay. So the marketplace is able to take other products, which are not NetSol products Because it's become part of an ecosystem and because it's all API first, they're all compatible. And in fact, if there's a client who wants to buy a product from the marketplace, which is not ours. We can actually make that happen, but we Take a piece of the revenue from whoever owns the products.

Speaker 5

So it becomes a little bit like an App Store.

Speaker 4

Got it, got it. Thank you. That's all for me.

Speaker 5

Okay.

Operator

Thank you. Thank you. At this time, I will now turn the call back to Roger Almond for closing remarks.

Speaker 3

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

Operator

Thank you. Thank you for joining us for today's NetSol 4th quarter year end 2023 earnings call. You may now disconnect at this time.

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Earnings Conference Call
NetSol Technologies Q4 2023
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