NetSol Technologies, Inc. Form 10-Q Summary
Business context and reporting period
NetSol designs, develops, markets and exports enterprise software and related services for the automobile financing and leasing, banking and financial-services industries. Its principal offerings include NFS Ascent, NFS Digital, Otoz and legacy LeasePak and LeaseSoft products. The unaudited Form 10-Q covers the quarter and nine months ended March 31, 2023, representing fiscal 2023 third-quarter results, with comparisons to the periods ended March 31, 2022.
Key financial metrics
| Metric | Three months ended March 31, 2023 | Three months ended March 31, 2022 | Nine months ended March 31, 2023 | Nine months ended March 31, 2022 |
|---|---|---|---|---|
| Net revenue | $13.5 million | $14.8 million | $38.6 million | $43.7 million |
| Gross profit | $4.7 million | $5.8 million | $12.1 million | $18.9 million |
| Gross margin | 34.8% | 39.4% | 31.3% | 43.3% |
| Operating income (loss) | $(0.9) million | $(0.5) million | $(5.9) million | $0.5 million |
| Net income (loss) attributable to NetSol | $2.5 million | $(0.3) million | $(0.2) million | $1.3 million |
| Basic and diluted EPS | $0.23 | $(0.02) | $(0.01) | $0.12 |
| Net cash from operating activities | Not separately provided | Not separately provided | $2.6 million | $5.5 million |
- Quarterly revenue consisted of $2.0 million of license fees, $6.7 million of subscription and support revenue, and $4.9 million of services revenue.
- Nine-month revenue consisted of $2.2 million of license fees, $19.2 million of subscription and support revenue, and $17.2 million of services revenue.
- Cash and cash equivalents were $15.3 million at March 31, 2023, compared with $24.0 million at June 30, 2022. Approximately $13.1 million was held by foreign subsidiaries and was subject to foreign-country banking and repatriation risks.
- Current assets were $40.8 million versus current liabilities of $17.7 million. Accounts receivable were $9.2 million, and revenues in excess of billings were $13.7 million.
- Total loans and obligations under finance leases were $6.2 million, including $6.0 million classified as current. Total operating lease liabilities were $1.1 million.
- Net cash used in investing activities was $1.4 million, including $1.6 million of property and equipment purchases. Net cash used in financing activities was $0.5 million.
- Reported other income included foreign-currency exchange gains of $5.4 million in the quarter and $7.4 million for the nine-month period.
- Net adjusted EBITDA, a non-GAAP measure, was $3.3 million for the quarter and $1.9 million for the nine months, compared with $0.4 million and $3.2 million, respectively, in the prior-year periods.
Material changes versus the prior comparable period
- Quarterly revenue declined 8.8%, while nine-month revenue declined 11.7%. The nine-month decline primarily reflected lower license revenue and a $3.5 million one-time post-contract support catch-up recognized in the prior-year period.
- Quarterly services revenue fell $1.8 million, primarily because of lower ongoing implementation and change-request activity. Subscription and support revenue increased modestly in the quarter but declined $3.0 million for the nine-month period.
- Gross margin declined to 34.8% from 39.4% in the quarter and to 31.3% from 43.3% for the nine months. Management attributed pressure to higher personnel costs, new hires, salary increases and increased travel following the easing of travel restrictions.
- The company reported an operating loss of $5.9 million for the nine months, compared with operating income of $0.5 million in the prior-year period. Research and development expense increased 63% for the nine months.
- The quarterly net profit was driven substantially by the $5.4 million foreign-currency gain. Without this unusual item, underlying operating performance remained negative.
- Cash declined $8.7 million during the nine months, including a $9.3 million unfavorable effect from exchange-rate changes. Operating cash flow also declined by $3.0 million year over year.
- Debt and finance-lease obligations declined from $9.0 million at June 30, 2022 to $6.2 million at March 31, 2023, primarily through repayments and currency translation effects.
- Asia-Pacific remained the dominant region, representing 71.0% of quarterly revenue and 69.6% of nine-month revenue. Daimler Financial Services represented 28.0% of nine-month revenue and BMW Financial represented 8.3%, creating customer concentration.
Guidance, outlook, commentary and risks
- The company did not provide formal consolidated revenue or earnings guidance in the filing.
- Management expects recurring subscription and support revenue to gradually increase as legacy products and NFS Ascent implementations go live. Contracted but unsatisfied performance obligations were approximately $33.6 million at March 31, 2023; approximately $15.2 million was expected to be recognized over the next 12 months.
- Management highlighted a new Kubota Australia NFS Ascent agreement expected to generate approximately $5.0 million over five years, the launch of Flex for Haydock Finance in the United Kingdom, continued DFS implementations, Otoz’s 38th dealer launch and an AWS API Gateway delivery-partner relationship.
- The company expects approximately $2.5 million of capital expenditures over the next 12 months for business development and infrastructure enhancements, funded from current operations.
- Key risks include global economic weakness, recession concerns, inflation, higher interest rates, geopolitical conflict, political and economic instability in Pakistan, currency devaluation, customer concentration, project-delivery and revenue-recognition judgments, employee retention, technology obsolescence and dependence on third-party technologies.
- Foreign-exchange volatility is material. The Pakistani rupee weakened substantially against the U.S. dollar and euro, producing significant reported gains in the current period but also causing a $7.8 million cumulative translation loss attributable to NetSol for the nine months.
- The company stated that it was in compliance with borrowing covenants and had no defaults. Covenant breaches or a change in control of subsidiaries could accelerate repayment obligations.
- The filing reports no material legal proceedings, no identified risk-factor additions and effective disclosure controls as of March 31, 2023.
Important facts for investors to verify
- Whether recurring subscription growth and the $33.6 million performance-obligation backlog convert into revenue as projected.
- The sustainability of profitability excluding the $5.4 million quarterly and $7.4 million year-to-date foreign-currency gains.
- Whether gross margins recover from 31.3% year to date amid higher labor, travel and research-and-development costs.
- Cash availability at foreign subsidiaries, cash repatriation restrictions and the company’s ability to fund planned $2.5 million capital expenditures from operations.
- Customer concentration and renewal, implementation and billing status for Daimler Financial Services and BMW Financial.
- Compliance with NetSol PK and other subsidiary debt covenants, particularly as interest rates and local-currency volatility increase.
- Execution of the Kubota, DFS, Flex, Otoz and AWS-related initiatives and the timing of associated revenue.
- The filing’s unaudited status and management’s statement that interim results are not necessarily indicative of full-year performance.