NetSol Technologies, Inc. Form 10-Q Summary
Business Context and Reporting Period
NetSol designs, develops, markets, and exports software and related consulting, system integration, implementation, and maintenance services for the automobile financing, leasing, banking, and financial-services industries. Its principal products include NFS, NFS Ascent, NFS Mobility, LeasePak, LeaseSoft, and LoanSoft.
This unaudited Form 10-Q covers the three and six months ended December 31, 2016, representing fiscal second quarter and year-to-date fiscal 2017. The company operates primarily through North America, Europe, and Asia-Pacific, with Asia-Pacific contributing approximately 83% of quarterly consolidated revenue.
Financial Results and Key Metrics
| Metric | Three Months Ended Dec. 31, 2016 | Three Months Ended Dec. 31, 2015 | Six Months Ended Dec. 31, 2016 | Six Months Ended Dec. 31, 2015 |
|---|---|---|---|---|
| Net revenue | $17.64 million | $16.19 million | $32.64 million | $29.50 million |
| Gross profit | $8.44 million | $7.87 million | $14.53 million | $13.12 million |
| Gross margin | 47.84% | 48.61% | 44.52% | 44.48% |
| Operating income | $1.43 million | $2.08 million | $0.20 million | $2.03 million |
| Net income (loss) | $0.40 million | $1.76 million | $(1.29) million | $1.54 million |
| Net income (loss) attributable to NetSol | $(0.99) million | $0.88 million | $(2.75) million | $0.46 million |
| Net income (loss) per share | $(0.09) | $0.08 | $(0.26) | $0.05 basic |
- Quarterly revenue increased 8.9% year over year, driven primarily by license revenue of $5.35 million versus $0.71 million. Services revenue declined to $6.98 million from $9.57 million, while maintenance revenue increased to $3.79 million from $3.24 million.
- Six-month revenue increased 10.7%, with license revenue rising to $8.85 million from $1.90 million and maintenance revenue increasing to $7.19 million from $6.25 million. Services revenue fell to $12.79 million from $16.33 million.
- Operating expenses increased 21.2% in the quarter and 29.2% year to date, primarily reflecting higher selling and marketing costs, personnel costs, commissions, travel, business development, share grants, bonuses, and options.
- Foreign-currency losses increased to $0.62 million for the quarter and $1.04 million year to date, compared with $0.13 million and $0.25 million, respectively, in the prior-year periods.
- Reported adjusted EBITDA, a non-GAAP measure, was $1.02 million for the quarter and $1.17 million for the six-month period, compared with $2.57 million and $3.23 million, respectively, in the prior-year periods.
Liquidity, Cash Flow, Debt, and Balance Sheet
- Cash and cash equivalents were $9.51 million at December 31, 2016, down from $11.56 million at June 30, 2016. Approximately $7.87 million was held by foreign subsidiaries and intended to be permanently reinvested outside the United States.
- Net cash provided by operating activities was only $69,398 for the six months, down from $2.03 million in the comparable period. The decline reflected a $7.22 million increase in revenues in excess of billings and a $1.91 million reduction in unearned revenue.
- Net cash used in investing activities was $1.64 million, including $1.07 million of capital expenditures and investments related to eeGeo. Net cash used in financing activities was $0.59 million, including a $0.97 million dividend paid by a subsidiary to non-controlling interests.
- Current assets were $40.67 million versus current liabilities of $14.64 million. Accounts receivable and revenues in excess of billings totaled $28.26 million, up from $26.68 million at June 30, 2016. Days sales outstanding increased to 151 days from 100 days.
- Total debt and capital lease obligations were $4.87 million, including $4.37 million current and $0.50 million long term. The principal borrowing was a Pakistani subsidiary’s approximately $3.82 million revolving export-refinance facility.
- NetSol PK was in compliance with its debt covenants, including a 60:40 long-term debt-to-equity requirement and a 1:1 current ratio requirement. Management stated that there were no defaults.
Material Changes, Outlook, Risks, and Unusual Items
- Management reported completion of an initial NFS Ascent implementation in Australia and New Zealand, continuing implementation work in China, Korea, and South Africa, and new or completed legacy-system implementations in Thailand and China.
- The company sold a $0.50 million LeasePak license to a Korean automotive captive for U.S. operations and signed a technology-services collaboration with eeGeo.
- A restructuring initiated in December 2016 is expected by management to generate approximately $4 million of savings over the following year. The filing does not provide a detailed implementation schedule or full cost estimate for the restructuring.
- Management expects maintenance revenue to increase gradually as additional NFS and NFS Ascent customers go live. It remains optimistic about continuing operations but identifies growth, profitability improvement, capitalization, and progress in North America and Europe as key priorities.
- Management expects approximately $3 million of capital expenditures over the next 12 months for business development and infrastructure, to be funded from current operations. The filing cautions that funding may not be sufficient and that future equity financing could be dilutive.
- Key risks include foreign-exchange volatility, geopolitical unrest and terrorism, Brexit-related uncertainty, delayed customer receivables, political and economic conditions in operating countries, technology obsolescence, dependence on qualified personnel, and risks related to revenue recognition judgments.
- The company completed settlement of a securities class action in July 2016, with costs covered by insurers. A related shareholder derivative settlement remained subject to final court approval, with a hearing scheduled for April 6, 2017; insurers were expected to cover legal fees and expenses up to $175,000.
- The company invested in eeGeo using cash and services. NetSol PK’s investment was subject to minimum future service requirements, and shares could be forfeited if those requirements are not met.
- The company repurchased 7,500 shares at an average price of $5.18 during the quarter under a newly authorized program permitting repurchases of up to 500,000 shares over six months.
- Management concluded that disclosure controls were effective and that no material weakness existed in internal control over financial reporting. The filing reports no separate market-risk disclosures and no additional risk factors in Part II.
Important Facts for Investors to Verify
- Whether the announced restructuring achieves the expected approximately $4 million in annual savings without impairing delivery capacity or growth.
- Conversion of the elevated $18.12 million revenues-in-excess-of-billings balance into billings and cash, and whether days sales outstanding improves from 151 days.
- Whether NFS Ascent license sales and implementations produce sustained license and maintenance growth sufficient to offset declining services revenue.
- The effect of foreign-currency movements, particularly on Pakistan, the United Kingdom, and other international operations.
- Availability and location of cash, including the $7.87 million held by foreign subsidiaries and potential tax consequences of repatriation.
- Compliance with the NetSol PK borrowing covenants and repayment requirements for the approximately $4.87 million of debt and capital leases.
- Final approval and financial implications of the shareholder derivative settlement, and continued insurance coverage for related litigation costs.
- Future performance and recoverability of the eeGeo investment, including compliance with the required service commitments.