NetSol Technologies, Inc. — Form 10-Q Summary
Reporting period: Three months ended September 30, 2022, the company’s fiscal first quarter of 2023. The unaudited filing covers NetSol’s global software, subscription, support, implementation, consulting, BPO and IT-services businesses serving the automotive finance, leasing, banking and financial-services industries.
Financial performance and position
| Metric | Q1 FY2023 | Q1 FY2022 |
|---|---|---|
| Net revenue | $12.7 million | $13.4 million |
| Gross profit / margin | $4.3 million / 33.5% | $5.4 million / 40.6% |
| Operating loss / margin | $(1.9) million / (14.9%) | $(0.6) million / (4.8%) |
| Net income (loss) | $(0.4) million | $0.6 million |
| Net loss attributable to NetSol | $(0.6) million | $0.2 million |
| Basic and diluted EPS | $(0.06) | $0.02 |
| Adjusted EBITDA, net | $(27,568) | $770,132 |
| Cash flow from operating activities | $1.3 million provided | $3.4 million used |
- Revenue comprised $6.0 million of subscription and support, $6.4 million of services and $0.25 million of license fees. Core revenue was $11.7 million, and non-core revenue was $1.0 million.
- Cash and cash equivalents were $20.9 million at September 30, 2022, down from $24.0 million at June 30, 2022. Approximately $18.4 million was held by foreign subsidiaries.
- Current assets were $44.1 million versus current liabilities of $19.0 million. Accounts receivable were $7.3 million, while revenues in excess of billings totaled $14.1 million, including $0.7 million classified as long term.
- Total loans and finance-lease obligations were $7.7 million, including $7.4 million current and $0.3 million long term. Operating lease liabilities totaled $1.4 million.
- Capital expenditures were $1.35 million, compared with $0.22 million in the prior-year quarter. Net cash used in investing activities was $0.9 million, and net cash used in financing activities was $0.45 million.
- Average days sales outstanding increased to 165 days from 147 days. The combined balance of accounts receivable and revenues in excess of billings declined to $21.4 million from $24.1 million at June 30, 2022.
Material changes versus the prior comparable period
- Revenue declined 5.3% year over year, primarily because of foreign-currency depreciation. Management reported that revenue increased by approximately $2.1 million on a constant-currency basis but was reduced by approximately $2.8 million from currency effects.
- Subscription and support revenue decreased 3.4% on a reported basis but increased on a constant-currency basis. Services revenue decreased 10.3% as reported but increased on a constant-currency basis. License fees increased to $0.25 million, including approximately $0.19 million from a government agreement in Pakistan.
- Cost of revenues increased to 66.5% of revenue from 59.4%. Salaries and consultant costs increased due to salary raises and hiring, while travel costs increased as travel restrictions eased.
- Gross margin contracted by 7.1 percentage points, and the operating loss widened by $1.3 million. Operating expenses increased modestly on a reported basis but increased 21.4% on a constant-currency basis.
- The company recorded a $1.32 million foreign-currency gain, slightly above the prior-year gain of $1.28 million. This gain substantially offset the operating loss but did not prevent a net loss attributable to NetSol.
- Other comprehensive loss attributable to NetSol was $3.5 million, including a $2.9 million net foreign-currency translation loss.
- Asia-Pacific remained the largest region at 73.5% of revenue, while Europe declined to 17.7% from 24.4%. North America increased to 8.9% from 6.9%.
Guidance, outlook, risks and unusual items
- Management did not provide formal revenue or earnings guidance. It expects recurring subscription and support revenue to increase as legacy and NFS Ascent implementations go live.
- Management reported an approximately $200 million sales pipeline, a new AWS cloud partnership, a new Flex calculation-engine product, additional Otoz dealer deployments and new contracts involving Otoz, BAIC, BYD and other customers.
- Otoz had reached 28 dealers in 13 states; management estimated that new dealer onboarding could generate approximately $0.75 million to $1.0 million of annual recurring revenue.
- The company expects approximately $2 million of capital expenditures over the next 12 months for APAC, U.S. and European business development and infrastructure, funded from current operations.
- Management cited recession concerns, inflation, higher interest rates, geopolitical conflict, China travel restrictions, political uncertainty in Pakistan, employee turnover and higher compensation costs as risks. Currency weakness in the Pakistani rupee and British pound adversely affected reported results.
- Customer concentration is material: Daimler Financial Services represented 28.3% of quarterly revenue and BMW Financial represented 11.6%. Together, they represented approximately 39.9% of revenue.
- The company had $4.25 million of convertible notes receivable from related party WRLD3D, plus $0.7 million of accrued interest, fully reserved. A $1.24 million related-party receivable was also fully reserved.
- All disclosed borrowing covenants were reported as satisfied, with no defaults. Borrowings may accelerate upon covenant breaches or certain changes in control of subsidiaries.
- The company issued 12,660 shares valued at $39,750 for director services and OTOZ issued 191,011 shares, increasing the non-controlling interest in OTOZ and OTOZ Thailand.
- Management concluded that disclosure controls were effective and reported no material changes in internal control over financial reporting. The filing disclosed no legal proceedings or additional risk factors for the quarter.
Important facts for investors to verify
- Whether the reported $200 million pipeline converts into signed contracts and recognized revenue, and the timing of the approximately $38.3 million of remaining performance obligations.
- Progress toward restoring gross margins, which fell to 33.5%, and achieving sustainable positive operating income without relying on foreign-currency gains.
- Cash availability at foreign subsidiaries, repatriation constraints and the company’s ability to fund planned capital expenditures from operations.
- Renewal and concentration exposure related to Daimler Financial Services and BMW Financial.
- Currency, inflation, wage and interest-rate effects on Pakistan, the United Kingdom and other foreign operations.
- Compliance with subsidiary debt covenants and refinancing or repayment requirements for short-term borrowings.
- Recoverability of fully reserved WRLD3D-related receivables and the carrying value of the remaining Drivemate investment.
- Actual recurring revenue generated by Otoz, NFS Ascent, Flex and other cloud or subscription initiatives.