NetSol Technologies, Inc. — Form 10-Q Summary
Business Context and Reporting Period
NetSol provides enterprise software, licensing, implementation, maintenance, consulting, system integration, business-process outsourcing and related IT services for the automobile financing, leasing, banking and financial-services industries. The filing covers the three and nine months ended March 31, 2020, representing the third quarter and first nine months of fiscal 2020. The filing is unaudited. The request label “2019 Q3” does not match the filing period.
Key Financial Metrics
| Metric | Three months ended March 31 | Nine months ended March 31 |
|---|---|---|
| Net revenue | $13.5 million, versus $17.1 million | $42.8 million, versus $50.5 million |
| Gross profit / margin | $6.0 million / 44.5%, versus $8.6 million / 50.0% | $19.9 million / 46.6%, versus $25.7 million / 50.8% |
| Operating income (loss) | $(0.4) million / (2.8% margin), versus $2.1 million / 12.2% | $(0.1) million / (0.2% margin), versus $5.9 million / 11.6% |
| Net income (loss) attributable to NetSol | $1.0 million, versus $1.3 million | $(0.2) million, versus $5.1 million |
| Basic and diluted EPS | $0.09, versus $0.11 | $(0.02), versus $0.44 |
| Adjusted EBITDA, net | $1.8 million, versus $2.2 million | $2.3 million, versus $8.5 million |
Quarterly revenue declined 21.0% year over year, while nine-month revenue declined 15.3%. License revenue fell sharply, partly because the prior-year period included approximately $2.1 million related to implementation of the DFS NFS Ascent Retail Platform. Maintenance revenue increased as DFS markets went live, while services revenue declined in the quarter and was modestly lower for the nine-month period.
Cash and cash equivalents were $15.7 million at March 31, 2020, compared with $17.4 million at June 30, 2019. Current assets were $53.1 million and current liabilities were $20.6 million. Net cash provided by operating activities for the nine months was $0.4 million, compared with $0.3 million of cash used in the prior-year period. Investing cash outflow was $1.6 million, including $1.0 million of capital expenditures and $0.6 million invested in a related-party convertible note. Financing cash outflow was $0.02 million.
Total loans and finance-lease obligations were $9.1 million, including $8.8 million current and $0.3 million long term. Operating lease liabilities totaled $2.8 million following adoption of the new lease standard. The company reported compliance with its borrowing covenants and no defaults.
Material Changes Versus Prior Comparable Period
- Quarterly gross margin decreased to 44.5% from 50.0%; nine-month gross margin decreased to 46.6% from 50.8%.
- Operating results moved from profit to loss, primarily because of lower revenue and higher cost of revenue and general and administrative expense as percentages of sales.
- Nine-month net income attributable to NetSol changed to a $0.2 million loss from $5.1 million of income.
- Quarterly foreign-currency gain increased to $1.8 million from $0.05 million, partially offsetting the operating loss. The nine-month foreign-currency gain decreased to $0.07 million from $2.6 million.
- Asia-Pacific remained the dominant region, generating 70.4% of quarterly revenue and 72.7% of nine-month revenue. Nine-month Asia-Pacific revenue declined substantially from the prior year, while North America and Europe increased.
- Accounts receivable plus revenues in excess of billings declined to $30.8 million from $31.7 million at June 30, 2019, while reported average days sales outstanding increased to 201 days from 174 days.
- The company adopted ASC 842, recording operating lease right-of-use assets of $2.7 million and operating lease liabilities of $2.8 million at March 31, 2020. The adoption did not materially affect operating results or cash flows.
Guidance, Outlook, Commentary and Risks
Management remained optimistic about the continuing business and highlighted traction in NFS Ascent SaaS, cloud demand, mobility and digital transformation, customer upgrades, OTOZ, and new contracts in Europe, China, North America and Australia/New Zealand. Management expects maintenance revenue to increase gradually as legacy and NFS Ascent implementations go live. The company identified approximately $63.6 million of contracted but unsatisfied performance obligations, with approximately $13.1 million expected to be recognized over the next 12 months.
Management expects approximately $2.5 million of capital expenditures over the next 12 months for Asia-Pacific, the United States and Europe, funded from current operations. No formal revenue or earnings guidance was provided.
COVID-19 was identified as a material uncertainty. Management noted potential benefits from lower travel, office and maintenance costs and possible new opportunities, but also warned of recessionary conditions, customer implementation delays, reduced automotive and OEM activity, travel restrictions, business disruption and elongated purchasing decisions. The company stated that the ultimate financial impact could not be determined and made no financial-statement adjustments for COVID-19.
Other key risks include foreign-currency volatility, political and economic conditions in operating countries, concentration of revenue and receivables with Daimler Financial Services and BMW Financial, collection risk from large contract-asset balances, reliance on key personnel and technology, related-party investments and notes receivable, and covenant or refinancing risk. The company reported approximately $14.7 million of cash held by foreign subsidiaries and foreign deposits that were uninsured.
Investor Verification Checklist
- Verify the effect of COVID-19 on new sales, implementations, customer collections, utilization, margins and cash flow after March 31, 2020.
- Review the sustainability and timing of maintenance growth, NFS Ascent SaaS adoption, and the $63.6 million remaining performance obligation balance.
- Assess customer concentration: Daimler Financial Services and BMW Financial represented 27.8% and 16.1% of nine-month revenue, respectively.
- Reconcile the large contract-asset balance of $16.6 million and the increase in days sales outstanding to 201 days.
- Evaluate liquidity access given $8.8 million of current debt maturities, foreign-held cash, related-party note receivables and planned capital expenditures.
- Separate operating performance from the quarter’s $1.8 million foreign-currency gain and other non-operating items.
- Review the company’s related-party investments, including the $4.25 million WRLD3D convertible note receivable and associated collectability and maturity terms.