NETSOL Technologies, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended March 31, 2021. The filing metadata references “2020 Q3,” but the filing itself is the fiscal 2021 third-quarter report. Financial statements are unaudited and presented under U.S. GAAP.
Business Context
NETSOL provides enterprise software, licensing, subscription, support, implementation, consulting, and IT services primarily to the automobile financing, leasing, banking, and financial-services industries. Its principal products include NFS, NFS Ascent, NFS Digital, Otoz, LeasePak, LeasePak-SaaS, LeaseSoft, and LoanSoft. Operations span North America, Europe, and Asia-Pacific, with Asia-Pacific representing 72.7% of quarterly revenue and 71.0% of year-to-date revenue.
Financial Performance and Liquidity
| Metric | Three months ended March 31, 2021 | Three months ended March 31, 2020 | Nine months ended March 31, 2021 | Nine months ended March 31, 2020 |
|---|---|---|---|---|
| Revenue | $13.8 million | $13.5 million | $39.6 million | $42.8 million |
| Gross profit | $6.4 million | $6.0 million | $18.8 million | $19.9 million |
| Gross margin | 46.6% | 44.5% | 47.7% | 46.6% |
| Income (loss) from operations | $0.5 million | $(0.4) million | $1.6 million | $(0.1) million |
| Net income (loss) attributable to NETSOL | $(0.6) million | $1.0 million | $(0.1) million | $(0.2) million |
| Basic and diluted EPS | $(0.05) | $0.09 | $(0.01) | $(0.02) |
| Adjusted EBITDA, net | $0.2 million | $1.8 million | $2.4 million | $2.3 million |
Quarterly revenue increased 1.9%, while nine-month revenue declined 7.6%. Quarterly license revenue rose to $2.1 million from $0.1 million, and subscription and support revenue increased to $5.7 million from $5.2 million. Services revenue declined to $6.0 million from $8.2 million. For the nine-month period, license and subscription revenue increased, but services revenue declined by $6.7 million.
Cash and cash equivalents were $30.6 million at March 31, 2021, compared with $20.2 million at June 30, 2020. Current assets were $55.6 million and current liabilities were $25.6 million, implying working capital of approximately $30.0 million. Approximately $28.7 million of cash was held by foreign subsidiaries and was uninsured. Net cash provided by operating activities was $10.4 million for the nine months, compared with $0.4 million in the prior-year period.
Net cash used in investing activities was $2.1 million, including $2.1 million of capital expenditures. Net cash used in financing activities was $0.5 million, including $2.1 million of treasury-stock repurchases, $2.1 million of bank-loan proceeds, and $0.5 million of net payments on loans and finance leases.
Total loans and finance-lease obligations were $13.5 million, including $12.6 million due within one year and $0.9 million long term. Operating lease liabilities totaled $1.7 million. Management stated that the company and its subsidiaries were in compliance with applicable debt covenants and expected to repay obligations from internal sources.
Material Changes Versus Prior Comparable Period
- Quarterly operating income improved from a $0.4 million loss to $0.5 million of income, primarily due to lower operating expenses and improved gross margin.
- Quarterly net loss attributable to NETSOL was $0.6 million, compared with net income of $1.0 million in the prior-year quarter. The principal adverse factor was a $1.8 million foreign-currency loss, compared with a $1.8 million gain in the prior year.
- Nine-month operating income improved from a $0.1 million loss to $1.6 million of income, despite lower revenue.
- Quarterly gross margin increased by 210 basis points, while nine-month gross margin increased by 110 basis points. Travel costs fell substantially because of COVID-19 restrictions.
- The company repurchased 603,688 shares for $2.1 million during the nine months. The board-approved $2.0 million repurchase program was extended through June 28, 2021.
- The company adopted ASC 326, resulting in a $6.8 million cumulative-effect reduction to retained earnings for expected credit losses, including a full allowance against $4.25 million of related-party convertible notes receivable and related accrued interest.
- Revenues in excess of billings declined to $10.7 million from $18.5 million at June 30, 2020, while deferred revenue increased to $5.7 million from $4.1 million.
Guidance, Outlook, Commentary, and Risks
No formal quantitative revenue or earnings guidance was provided. Management expects recurring subscription and support revenue to increase as additional NFS legacy and NFS Ascent customers go live. It reported increased traction for NFS Ascent SaaS, cloud demand, digital-transformation initiatives, and the Otoz mobility platform.
Quarter highlights included a LeasePak SaaS go-live at a U.S. regional bank, more than $1.0 million of change-request revenue, the start of an NFS Ascent Retail implementation for a German auto manufacturer’s South Korean subsidiary, and approximately $2.1 million of license revenue from a Thailand customer renewal.
Management anticipates approximately $2.0 million of capital expenditures over the next 12 months for Asia-Pacific, U.S., and European business development and infrastructure enhancements, expected to be funded from operations.
Key risks include continuing COVID-19 effects on customers and auto manufacturers, delayed customer purchasing decisions, travel and event restrictions, foreign-currency volatility, political and trade tensions involving China, concentration of revenue among major customers, collection risk, and the ability to retain qualified technical personnel. Daimler Financial Services and BMW represented 19.6% and 10.9%, respectively, of nine-month revenue.
Contracted but unsatisfied performance obligations were approximately $46.4 million at March 31, 2021; management expects to recognize approximately $14.2 million over the next 12 months and the remainder over an estimated five years. Actual timing depends partly on customer implementation schedules.
The filing reports no legal proceedings, no separately disclosed risk-factor changes, no defaults upon senior securities, and effective disclosure controls and procedures.
Investor Verification Priorities
- Verify the period designation: the filing covers the quarter ended March 31, 2021, despite the request metadata identifying 2020 Q3.
- Assess the sustainability of revenue growth given the decline in services revenue and the company’s reliance on license renewals and customer go-lives.
- Monitor foreign-currency exposure, particularly the impact of Pakistan rupee movements on reported earnings.
- Review recoverability of the fully reserved related-party convertible notes and other receivables following the $6.8 million ASC 326 adjustment.
- Evaluate liquidity after considering that most cash is held by foreign subsidiaries, debt maturities are heavily weighted to current liabilities, and approximately $2.0 million of capital spending is planned.
- Track customer concentration, unsatisfied performance obligations, and the timing of implementation milestones and billings.
- Reconcile adjusted EBITDA to GAAP results and consider the effect of non-cash adjustments and non-controlling interests.