Business Context and Reporting Period
NetSol Technologies, Inc. provides software licenses, maintenance, implementation, consulting, and IT services to the automobile financing and 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 months ended September 30, 2016, NetSol’s fiscal first quarter, with comparison to the three months ended September 30, 2015.
Key Financial Metrics
| Metric | Q1 FY2017 | Q1 FY2016 |
|---|---|---|
| Total revenue | $15.0 million | $13.3 million |
| Gross profit | $6.1 million | $5.2 million |
| Gross margin | 40.62% | 39.45% |
| Operating loss | $1.2 million | $57 thousand |
| Operating margin | (8.21%) | (0.43%) |
| Net loss attributable to NetSol | $1.8 million | $411 thousand |
| Net loss per share | $0.17 | $0.04 |
| Net cash used in operating activities | $218 thousand | $3.2 million |
- Revenue increased 12.8% year over year. License revenue more than tripled to $3.75 million, maintenance revenue increased to $3.53 million, and services revenue declined to $7.72 million.
- Asia-Pacific generated $11.2 million, or 74.77% of consolidated revenue; North America generated $1.84 million and Europe $1.94 million.
- Gross profit increased 16.1%, while gross margin improved by 117 basis points. Cost of revenues increased 10.6% to $8.9 million.
- Operating expenses rose 38.1% to $7.3 million, driven primarily by higher selling and marketing costs, general and administrative expenses, hiring, compensation, travel, and business-development spending.
- Foreign-currency losses increased to $415 thousand from $114 thousand, contributing to total other expenses of $420 thousand.
- Adjusted EBITDA, a non-GAAP measure, declined to $180 thousand from $659 thousand. Investors should consider this measure alongside GAAP results.
- Cash and cash equivalents were $11.16 million at September 30, 2016, compared with $11.56 million at June 30, 2016. Current assets were $40.9 million versus current liabilities of $15.3 million.
- Accounts receivable and revenues in excess of billings totaled $26.6 million, and average days sales outstanding increased to 159 days from 116 days.
- Total debt and capital lease obligations were $4.95 million, including $4.41 million current and $540 thousand long term. The company reported compliance with applicable debt covenants and no defaults.
- Cash used in investing activities was $959 thousand, including $555.6 thousand invested in eeGeo and $554.9 thousand of property and equipment purchases. Financing activities provided $242 thousand.
Material Changes Versus the Prior Comparable Period
- Revenue growth was led by NFS Ascent and regional license sales, including a $500 thousand LeasePak license sale to a Korean automotive captive for U.S. operations.
- Services revenue decreased by $1.22 million because of lower consulting and implementation activity, partially offset by higher license and maintenance revenue.
- Operating performance deteriorated despite revenue growth because selling and marketing and general and administrative expenses increased substantially. Stock-based compensation increased to $887 thousand from $78 thousand.
- Net loss attributable to NetSol increased by $1.35 million, and the loss margin widened to 11.77% from 3.09%.
- Operating cash burn improved significantly from $3.18 million to $218 thousand, although working-capital balances remained substantial and receivable collection periods lengthened.
- Other comprehensive loss improved because of a $1.09 million foreign-currency translation gain, compared with a $1.25 million translation loss in the prior-year quarter.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management described its outlook as optimistic and expects continued growth in NFS Ascent, legacy products, maintenance revenue, and international markets. The filing does not provide formal revenue or earnings guidance.
- Management expects approximately $2 million to $3 million of capital expenditures over the next 12 months for business development and infrastructure, to be funded from current operations.
- Reported business achievements included completion of an initial NFS Ascent implementation in New Zealand, continued implementation for a UK customer contract valued at approximately $8 million, and progress in Australia, Korea, and China.
- Principal risks include foreign-exchange volatility, Brexit-related uncertainty, geopolitical unrest and terrorism, delayed customer collections, restricted customer liquidity, technology obsolescence, dependence on qualified personnel, and the risk that third-party technologies or licenses may become unavailable or uneconomic.
- The company holds approximately $8.72 million of cash in foreign subsidiaries and intends to permanently reinvest those funds outside the United States, which could create additional U.S. tax costs if repatriation becomes necessary.
- NetSol and its Pakistani subsidiary increased their investment exposure to eeGeo. The subsidiary is required to provide specified future services and may forfeit shares if service obligations are not met.
- The federal securities class-action settlement received final approval in July 2016 and was covered by the company’s insurers. Related shareholder derivative settlements remained subject to court approval; insurer-paid legal fees and expenses were capped at $175 thousand.
- Management concluded that disclosure controls were effective and that no material weakness existed in internal control over financial reporting. The filing reports no market-risk disclosures, additional risk factors, defaults, or unregistered sales.
Important Facts for Investors to Verify
- Whether NFS Ascent implementations and the approximately $8 million UK contract convert into sustained license, maintenance, and services revenue.
- Whether operating expenses, stock-based compensation, and hiring costs moderate enough to restore operating profitability.
- Collection of the $26.6 million combined accounts-receivable and unbilled-revenue balance and reversal of the 159-day days-sales-outstanding trend.
- The liquidity and repatriation constraints associated with approximately $8.72 million held by foreign subsidiaries.
- Compliance with the NTE and NetSol PK debt covenants and repayment of approximately $4.95 million of debt and capital lease obligations.
- Performance and contractual obligations related to the eeGeo investment, including the potential forfeiture of shares.
- Final resolution and financial implications of the shareholder derivative litigation.