NetSol Technologies Q3 2024 Earnings Call Transcript

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Provided by Quartr
May 20, 2024

There are 7 speakers on the call.

Operator

Good morning. Welcome to NetSol Technologies Third Quarter 2024 Earnings Conference Call. On the call today are Najeeb Ghauri, Chairman and Chief Executive Officer Roger Almond, Chief Financial Officer Patti MacGlassen, General Counsel and Naeem Ghauri, President and Founder. 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.

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 may 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 our 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 those 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.nesoltech.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. The Q3 of 2024 was another very strong quarter for our business highlighted by revenue growth and our 3rd consecutive quarter of profitability. In this quarter, we demonstrated NetSol's ability to deliver profitable results without the recognition of material license fees. We reported strong services revenues and consistent subscription and support revenues, which contributed to us achieving earnings per share of $0.03 for the quarter. Our ability to achieve profitability without significant license fees showcases the enhanced strength and reliability of our model as we continue to win new customers on a global scale and these past several quarters in particular are an excellent example of our hybrid license and SaaS model at work.

Speaker 2

In the 1st and second quarter of the fiscal 2024, we recognized substantial license fees, which translated to consecutively profitable quarters to start the year. As we continue to build our customer base, these new contracts are now generating services revenues for our business with services revenues in the Q3 of fiscal 2024 increasing approximately 60% compared to the Q3 of fiscal 2023. This is an encouraging development as we have traditionally needed to recognize licensees in a given quarter to achieve profitability. We have a healthy sales pipeline of both license and SaaS deals in our established markets and we are intently focused on building similar pipelines in our more nascent markets, specifically the United States. We are also very excited by the progress we are making advancing our initiatives in the U.

Speaker 2

S. Market. We're noticing strong interest from the U. S. Based customers, specifically in the Professional Services segment of our AWS Cloud Services, data analytics and AI based products.

Speaker 2

We anticipate to leverage professional service talent in North America and create additional revenue stream. We believe that there is tremendous potential for growth in this market and we are strategically allocating capital to make sure we are ideally positioned to capture our SaaS offerings in particular and gaining some strong early traction in this region. With our autos, digital, retail and mobility platform currently live in 58 minutei USA dealerships across the U. S. And with AutoNation powering the back end of their recently launched MicroLease marketplace, our successful journey with Mini Anywhere and AutoNation Mobility has opened new opportunities in the retail and mobility sector in the U.

Speaker 2

S. The U. S. Market is home to thousands of major auto franchise dealerships across the country looking to adopt omni channel digital retail solutions and modernize their vehicle sales and purchase processes. This interest has resulted in strong pipeline activity with OEMs and dealer groups of various sizes demonstrating interest in our autos products.

Speaker 2

With our visibility today, we believe that we will be able to achieve at least $28,000,000 in subscription and support revenues for the full fiscal year 2024. We are intently focused on the continuous innovation and improvement of our products and offerings to meet the diverse demands of our customers. To that end, we have begun leveraging deep learning AI algorithms into our business processes and have launched a company wide AI initiative to both reduce internal costs and enhance external quality improvements. As a long standing global business services and asset finance solution providers, we have nearly 27 years of internal program management data, which we intend to use to train our AI use cases and further enhance efficiencies for both us and our customers. We're also in the process of creating industry leading AI use cases for our clients to help improve their business metrics with an anticipated launch of several new AI based offerings in the calendar year, which is something that we are very excited about and will keep you apprised as we continue to progress this initiative.

Speaker 2

Overall, we are very pleased with our results in both the Q3 and the fiscal year to date. We are beginning to realize the strength of our business model exemplified by consistent revenue improvement and 3 straight quarters of profitability. Given our results, we remain confident in our expectations of double digit organic revenue growth and improved margins and we are on pace to reach our target revenue range of between $60,000,000 to $61,000,000 for the full fiscal year of 2024. I now turn the call over to Raj Amman, our CFO, to go over our financials from this quarter. Raj?

Speaker 3

Thanks, Najeeb. Before I go over our financial results, I would like to provide some additional information on the selection of our new auditor, Fortune CPA. On May 6, 2024, B. F. Forgers was dismissed as the independent public accounting firm of NetSol Technologies as a result of B.

Speaker 3

F. Forger's well publicized suspension from appearing and practicing before the SEC, which affected hundreds of public companies. The Audit Committee and the Board of Directors mobilized quickly, approving this dismissal and appointment of Fortune CPA to service the company's independent registered public accounting firm for both the quarter ended March 31, 2024 and the year ended June 30, 2024. We believe that Fortune CPA is well suited to assist us in our auditing responsibilities and we look forward to working with them going forward. With that, I will now go over our financial results.

Speaker 3

Our total net revenues for the Q3 of fiscal 2024 were 15 point $5,000,000 in the prior year period. On a constant currency basis, total net revenues were $15,600,000 dollars License fees for the Q3 of fiscal 2024 were $558,000 compared with $2,000,000 in the prior year period. License fees on a constant currency basis were $577,000 Recurring revenues or subscription and support revenues for the Q3 of fiscal 2024 were $7,100,000 compared with $6,700,000 in the prior year period. Subscription and support revenues on a constant currency basis were $7,200,000 Total services revenue for the Q3 of fiscal 2024 were $7,800,000 compared with $4,900,000 in the prior year period. Total services revenue for the Q3 of 2020 4 on a constant currency basis were $7,800,000 Total cost of revenues was $8,000,000 for the Q3 of fiscal 2020 4 compared to $8,800,000 in the Q3 of fiscal year 2023.

Speaker 3

Gross profit for the Q3 2024 was $7,500,000 or 48 percent of net revenues compared with $4,700,000 or 35 percent of net revenues in the prior year period. Gross profit was $7,200,000 or 46 percent of net revenues revenues on a constant currency basis. Operating expenses for the Q3 of fiscal 2024 were $6,200,000 or 40% of sales compared to $5,600,000 or 42 percent of sales in the same period last year. On a constant currency basis, operating expenses for the Q3 were $6,300,000 or 41 percent of sales. Turning to our profitability metrics.

Speaker 3

GAAP net income attributable to net sold for the Q3 of fiscal 2024 totaled $328,000 or $0.03 per diluted share compared with a GAAP net income of $2,500,000 or $0.23 per diluted share in the Q3 of fiscal 2023. Included in our net income in the quarter was a loss of $964,000 on foreign currency exchange transactions compared to a gain of $5,400,000 in the Q3 of 2023. Because we operate in several geographical regions, a significant portion of our business is conducted in currencies other than the U. S. Dollar.

Speaker 3

A decrease in the value of the U. S. Dollar compared to foreign currency exchange rates should not have the effect of increasing our revenues, but it also increases our expenses denominated in currencies other than the U. S. Dollar.

Speaker 3

Similarly, as the U. S. Dollar gain strength relative to foreign exchange rate, it tends to reduce our revenues, but it also reduces our expenses denominated in currencies other than the U. S. Dollar.

Speaker 3

Moving to our non GAAP metrics, non GAAP adjusted EBITDA for the Q3 fiscal 2024 was 810,000 dollars or $0.07 per diluted share compared with non GAAP adjusted EBITDA of $3,300,000 or $0.29 per diluted share in the Q3 of the previous fiscal year. Please see the reconciliation schedules contained in our earnings release for our revised calculations of adjusted EBITDA for the quarters ended March 31, 20242023. Turning to our balance sheet. At quarter end, we had cash and cash equivalents of approximately $12,300,000 or approximately $1.08 per diluted common share. Total stockholders' equity total net stockholders' equity at March 31, 2024 was $35,300,000 or $3.10 per share.

Speaker 3

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

Speaker 2

Thank you, Roger. We are very pleased to have delivered another strong quarter for our business and remain committed to driving continued growth of value for our shareholders in the Q4 as we close out the fiscal year. With that, I'd like to turn the call over to the operator for any questions or Q and A. Operator?

Operator

We'll take our first question from Todd Felt with Aegis Financial Services. Please go ahead.

Speaker 4

Hey, congratulations on a solid quarter and really nice to see the growth in the reoccurring revenues and improvement margins. So just kind of breaking it down, every year since 2015, our annual revenue has been kind of stuck in the range of $51,000,000 on the low side $61,000,000 on the high side. And we've been hearing about our healthy pipeline and sales for many quarters with tremendous potential for growth. So do you think that fiscal year 2025 is a year that we can break out of this revenue range that we've been in the last 10 years?

Speaker 2

First of all, thank you so much for your comment, Todd. I appreciate your comments. Absolutely, I'll have Nemo to jump in, in a minute. Look, we are very confident. We have turned the corner.

Speaker 2

This fiscal year is proof 3 quarters continuously. Yes, we've gone through very difficult time, COVID, post COVID and many other challenges. But our business is really picking up in a sense that customers keep calling us, the current customers, whether they're in APAC or China or North America or even Europe to continue to do business with us, the new markets and new locations. So there's a lot of excitement in the company, Todd, because there's new things opening up for our company. And this is why we feel that next fiscal year will be could be our strongest fiscal year, absolutely.

Speaker 2

And there's a very positive response from new prospects and pipeline is healthy. U. S. Market is strong for us and we're making good progress in the U. S.

Speaker 2

On some new developments and they will be shared with you when they become material. Let me have Naim jump in here to give his color. Naim, go ahead.

Speaker 5

Hi, Todd. I think you are right about just the last 4 to 5 years in terms of not getting above this the ceiling we have about the $60,000,000 And I think there's 2 or 3 very specific reasons for this. One was a product transition from our previous generation to Ascent that disrupted sales and by the time we hit inflection on a sense, we were hit by COVID. And then during COVID, we've also been made a decision to start changing our financial model in terms of replacing SaaS sorry, replacing license income with SaaS. So these three periods had an impact.

Speaker 5

I really strongly believe now that we're out those times of transition and we are going to hit a tipping point where we will break out of the $60,000,000 cut out if you like.

Speaker 2

I want to add one more thing for Todd and for all of the listeners. We've been focusing on organic growth and the new thing that Naimo just mentioned in the innovation and so forth. So we have not done any M and A for many, many years by choice, we believe. Gradually, surely building organic business with amazing customer, global references and NetSol is most well liked company in terms of our delivery record. Even our competitors complement Naim frequently in the different locations.

Speaker 2

So I think based on our record and trajectory, I think we are on the right track of natural growth. And right now, we're focusing on doing things organically. And when the time comes, when we are ready in the balance sheet, then we look into M and A opportunity. But for right now, organic will be growing and we're pretty confident next fiscal year will be a record year for us.

Speaker 4

That's great to hear. And just to clarify, I'd said the revenue range was I think $51,000,000 to $68,000,000 And I think that's I think $67,800,000 was our high on revenue the last 10 years. And I look forward to us getting in the 70s, 80s and hopefully in above 100 in the next few years. So just a follow-up question. Now that we're seemingly showing and forecasting consistent profitability moving forward, at least that's what I'm interpreting.

Speaker 4

Why do you think our stock trades significantly below our book value, which is now over $3 a share while other companies that also kind of use and develop AI and I know we're moving into that area. These other companies, especially the profitable ones are trading at multiples higher.

Speaker 2

Well, I can say what I feel and so I can name and I'll ask you what you think is the reason coming from an outsider who can see market differently than we do. But look, yes, it is we don't like it. This has been a company listed for many, many years on NASDAQ, and we remain focused. We don't go out extra mile other than higher program we have, the IMS. They're doing a good job.

Speaker 2

But we don't go out of extra mile to do conferences and because we've been really focused on managing our business effectively and cost also efficiently. So there will be activities in the coming months that we can really start talking the stock in the conferences. And John and Walter are putting a program together for the company for next few months. Then now we feel comfortable, confident that we can go and tell the story again. So hopefully they'll have a positive impact.

Speaker 4

Okay. That's great to hear. That kind of emulates my thoughts. And I think that will change. And I think the market will fairly value us once we can hit if we can hit a $20,000,000 quarter.

Speaker 4

I don't think we've done that in quite some time and show the potential for rapid growth a lot of these other AI companies are having. That's why they trade at these multiples because they expect the revenue growth. So hopefully trending that direction and we can see the hockey stick growth.

Speaker 2

Absolutely. Absolutely. Thank you, Todd.

Speaker 4

I'll fall back in the queue. Thank you.

Operator

Thank you. We will move next with Christopher Fazeli with Fazeli Capital Partners. Please go ahead.

Speaker 6

Hey guys, thanks for taking the question. You provided a bit of color on this on the call, but can provide any additional context and detail as to how AI is specifically interacting with and enhancing your products?

Speaker 2

Yes. Naim is a champion of AI in the whole company and there's lots going on and he'll give you some color where we are. Naim, go ahead please.

Speaker 5

Yes. Hi, Chris. We would like to handle AI very holistically. I think there's a lot of hype that's been created by a lot of companies. I think we looked at it totally differently and we've been working on it quietly for some time now.

Speaker 5

So our approach is, so first of all, have a center of excellence and an AI lab internally, because internally we could benefit from building apps and products, which will create efficiencies in our own internal delivery process. From project management to software testing, automation, automated testing, software engineering, human resources, project planning, resource planning, there's so many different horizontal areas that we can touch with AI within the company. So there's first the benefit of leveraging AI for our own business. Secondly, within the AI net, we will provide a service to all of our clients to build their own POCs and use cases using our expertise and thought leadership. So our practice will leverage the relationships we've built over the last 30 plus years.

Speaker 5

So instead of our clients investing into their own AI initiatives organically, we are able to provide that service to them. So we will be reaching out to our clients in the course of the next quarter or 2 with our offering. And last not least, within our lab, we're also building use cases products that will have a direct impact on our clients' businesses and improving their business efficiencies and so on. These are complementary products that stand next to Ascent and Autos. These could be within our API first approach where we give plug and play them into the infrastructure.

Speaker 5

And we also want to be known as an AI first company where Sense and Autos have inbuilt AI modules that allow the customers to do so much more with less people as opposed to doing now. So I think we are doing a very comprehensive program trying to build AI into our product set, also into our business and how we deliver. So I think you start to see those impacts and how our operating cost is affected by being more efficient, how we could be faster in delivery, higher quality. And then at some point you'll start to see an impact of us selling products to our clients in addition to our traditional products.

Speaker 6

Got it. Okay, that's good to know. Thank you. That's all for me.

Speaker 5

Thank you.

Operator

Thank you. At this time, this concludes our question and answer session. If your question was not addressed during the Q and A session, or by calling them at 949-574-3860. 0. I would now like to turn the call over to Mr.

Operator

Gauri for his closing remarks.

Speaker 2

Thank you for joining us today. I'm especially more excited to see our global team executing in every front as it reflects in our quarterly performance and the future direction. I want to thank our investors for their continued support, our very loyal customers and of course, our dedicated employees worldwide for their ongoing contributions. I look forward to updating you in our next call. Thank you and have a good day.

Operator

Thank you for joining us today for NetSol's

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Earnings Conference Call
NetSol Technologies Q3 2024
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