NetSol Technologies, Inc. — Form 10-Q Summary
Business context and reporting period
NetSol provides enterprise software, licensing, subscription and support, implementation, consulting, and IT services primarily to the automobile financing, leasing, banking, and financial-services industries. Key offerings include NFS Ascent, NFS Digital, Otoz, LeasePak, and LeaseSoft. The filing covers the fiscal quarter and six months ended December 31, 2022, compared with the corresponding periods ended December 31, 2021. Financial statements are unaudited.
Financial performance and liquidity
| Metric | Three months ended Dec. 31, 2022 | Three months ended Dec. 31, 2021 | Six months ended Dec. 31, 2022 | Six months ended Dec. 31, 2021 |
|---|---|---|---|---|
| Revenue | $12.4 million | $15.5 million | $25.1 million | $28.9 million |
| Gross profit | $3.1 million | $7.6 million | $7.4 million | $13.1 million |
| Gross margin | 25.4% | 49.4% | 29.5% | 45.3% |
| Operating income (loss) | $(3.0) million | $1.7 million | $(4.9) million | $1.0 million |
| Net income (loss) attributable to NetSol | $(2.1) million | $1.4 million | $(2.7) million | $1.6 million |
| Basic and diluted EPS | $(0.19) | $0.13 | $(0.24) | $0.14 |
| Adjusted EBITDA, net | $(1.3) million | $2.1 million | $(1.4) million | $2.9 million |
Revenue declined 19.9% in the quarter and 13.1% year to date. Six-month revenue consisted of $12.5 million of subscription and support, $12.3 million of services, and $0.3 million of license fees. Services revenue increased, but subscription and support revenue declined and license revenue was substantially lower.
Cash and cash equivalents were $20.9 million at December 31, 2022, compared with $24.0 million at June 30, 2022. Six-month operating cash flow was positive at $1.7 million, compared with $(3.0) million in the prior-year period. Investing cash flow was $(1.2) million, including $1.3 million of capital expenditures, and financing cash flow was $(0.5) million from debt and finance-lease repayments.
Current assets were $43.1 million and current liabilities were $19.4 million. Total debt and finance-lease obligations were $7.7 million, including $7.4 million due within one year. Operating lease liabilities totaled $1.3 million. The company reported no defaults and stated that it was in compliance with applicable borrowing covenants.
Material changes versus the prior comparable period
- Quarterly gross margin fell to 25.4% from 49.4%; six-month gross margin fell to 29.5% from 45.3%.
- Cost of revenues increased to 74.6% of quarterly revenue from 50.6%, principally reflecting higher salaries and consultant costs and increased travel.
- Quarterly salaries and consultant costs increased 22.6%, while quarterly travel expense more than doubled as travel restrictions eased.
- Quarterly operating expenses increased 3.3%, including higher selling and marketing and research and development costs.
- License revenue declined sharply because the prior-year quarter included approximately $1.9 million from a new DTFS agreement.
- Subscription and support revenue declined partly because the prior-year period included approximately $3.5 million of one-time catch-up post-contract support revenue.
- Services revenue increased because of ongoing implementations and customer change requests.
- Foreign currency effects were significant: the company reported a six-month foreign-currency translation loss attributable to NetSol of $2.6 million and cumulative translation losses of $42.0 million at December 31, 2022.
- Asia-Pacific remained the largest region, generating 68.9% of six-month revenue. Daimler Financial Services represented 28.2% of six-month revenue and BMW Financial represented 9.2%, indicating customer concentration.
Guidance, outlook, commentary, risks, and unusual items
- No formal revenue or earnings guidance is provided in the filing.
- Management reported an approximately $250 million sales pipeline, a new U.S. tier-one automotive Otoz agreement, Otoz deployment at its 37th dealer, and approximately $1.0 million of revenue from customer change requests.
- Management expects recurring subscription and support revenue to increase gradually as NFS legacy products and NFS Ascent implementations go live. It also expects the AWS cloud-services partnership to support future cloud growth.
- Contracted but unsatisfied performance obligations were approximately $36.0 million, with approximately $14.5 million expected to be recognized over the next 12 months and the balance over an estimated three years.
- Management anticipates approximately $2.5 million of capital expenditures during the next 12 months for business development and infrastructure, funded from current operations.
- Key risks include recessionary conditions, higher interest rates and inflation, geopolitical instability, Pakistan political and economic conditions, foreign-exchange volatility, customer concentration, execution and staffing risks, technology obsolescence, and uncertainty in the timing of customer implementations.
- The company held approximately $18.6 million of foreign-subsidiary cash that was uninsured or otherwise subject to limited deposit insurance at December 31, 2022.
- Convertible notes and related-party receivables from WRLD3D had aggregate gross principal and accrued interest of approximately $5.0 million and were fully reserved, resulting in no net balance.
- Management stated that disclosure controls were effective and that there were no material changes in internal control over financial reporting. No legal proceedings, defaults, or additional risk factors were reported in Part II.
Most important facts for investors to verify
- Whether the sharp margin deterioration is temporary and whether staffing, travel, and implementation costs can be brought into line with revenue.
- The timing and conversion probability of the approximately $250 million pipeline and the $36.0 million of remaining performance obligations.
- Customer concentration and renewal or expansion trends for Daimler Financial Services and BMW Financial.
- The availability and repatriation constraints of foreign-subsidiary cash, including the approximately $18.6 million of uninsured foreign deposits.
- Compliance with borrowing covenants, refinancing requirements, and interest-rate exposure on Pakistan subsidiary facilities.
- The recoverability of fully reserved WRLD3D-related notes and receivables and the carrying value of other investments and intangible assets.
- Actual capital expenditures, operating cash generation, and liquidity relative to the projected $2.5 million of next-12-month investment needs.