NetSol Technologies, Inc. — Form 10-Q Summary
Reporting period: The filing covers the three and nine months ended March 31, 2024, NetSol’s fiscal third quarter of fiscal 2024. Although the request identifies “2023 Q3,” the filing period is March 31, 2024. The interim financial statements are unaudited.
Business context
NetSol provides enterprise software, subscriptions, support, implementation, consulting, IT, business-process outsourcing, and cloud services to the automotive finance, leasing, banking, and financial-services industries. Its principal products include NFS Ascent, NFS Digital, Otoz, and AppexNow. Operations are conducted globally, with Asia-Pacific representing the majority of revenue.
Financial performance and position
| Metric | Three months ended March 31, 2024 | Three months ended March 31, 2023 | Nine months ended March 31, 2024 | Nine months ended March 31, 2023 |
|---|---|---|---|---|
| Net revenue | $15.5 million | $13.5 million | $44.9 million | $38.6 million |
| Gross profit | $7.5 million | $4.7 million | $20.8 million | $12.1 million |
| Gross margin | 48.3% | 34.8% | 46.3% | 31.3% |
| Operating income (loss) | $1.3 million | $(0.9) million | $2.7 million | $(5.9) million |
| Net income (loss) attributable to NetSol | $0.3 million | $2.5 million | $0.8 million | $(0.2) million |
| Basic and diluted EPS | $0.03 | $0.23 | $0.07 | $(0.01) |
| Adjusted EBITDA, net | $0.8 million | $3.3 million | $2.0 million | $1.9 million |
- Quarterly revenue growth was driven primarily by services, which increased to $7.8 million from $4.9 million, and subscription and support revenue, which increased to $7.1 million from $6.7 million. License revenue declined to $0.6 million from $2.0 million.
- Nine-month revenue increased approximately 16% year over year. License revenue increased to $4.8 million, subscription and support revenue to $20.5 million, and services revenue to $19.6 million.
- Asia-Pacific generated $11.1 million, or 71.5%, of quarterly revenue and $32.6 million, or 72.6%, of nine-month revenue. Daimler Financial Services represented 27.2% of quarterly revenue and 26.3% of nine-month revenue.
- Quarterly and nine-month operating profitability improved materially because of higher revenue, lower cost of revenues as a percentage of sales, and reduced depreciation and amortization following the full amortization of certain capitalized software costs.
- Foreign-currency results were volatile. The company recorded foreign-exchange losses of $1.0 million for the quarter and $1.1 million for the nine-month period, compared with gains of $5.4 million and $7.4 million, respectively, in the prior-year periods.
- Cash and cash equivalents were $12.3 million at March 31, 2024, down from $15.5 million at June 30, 2023. Current assets were $46.2 million versus current liabilities of $22.9 million.
- Operating cash flow was negative $3.6 million for the nine months, compared with positive $2.6 million in the prior-year period. The principal uses included increases in accounts receivable and revenues in excess of billings.
- Accounts receivable and revenues in excess of billings totaled $32.2 million at March 31, 2024, up from $24.1 million at June 30, 2023. Reported average days sales outstanding increased to 172 days from 167 days.
- Total notes payable and finance lease obligations were $6.2 million, including $6.0 million classified as current. Operating lease liabilities totaled $1.5 million.
- Capital expenditures were $0.9 million for the nine months, compared with $1.6 million in the prior-year period.
Material changes versus the prior comparable period
- Quarterly revenue increased by $2.0 million, while gross profit increased by $2.8 million and gross margin expanded by 13.5 percentage points.
- Quarterly operating results improved from a $0.9 million loss to $1.3 million of income; however, net income attributable to NetSol declined because the prior-year quarter included a $5.4 million foreign-exchange gain.
- Nine-month operating results improved from a $5.9 million operating loss to $2.7 million of operating income, and NetSol moved from a $0.2 million loss to $0.8 million of net income.
- Cash conversion weakened, with operating cash flow changing from a $2.6 million inflow to a $3.6 million outflow, principally because of working-capital investment in receivables and contract assets.
- Revenues in excess of billings increased to $16.4 million from $12.4 million, including $0.8 million classified as long term. Unearned revenue increased to $9.5 million from $7.9 million.
- The company issued 54,384 shares for director and employee services during the nine-month period and granted 250,000 immediately vested stock options with a $2.15 exercise price.
Guidance, outlook, commentary, and risks
- Management expects subscription and support revenue to increase gradually as legacy products and NFS Ascent implementations go live. The filing does not provide formal consolidated revenue or earnings guidance.
- Management cited customer wins and expansions, including approximately $3.5 million of additional revenue from a renegotiated UK contract, approximately $1.0 million from a Netherlands implementation, and nearly $0.3 million from a Middle East ride-hailing application contract.
- Contracted but unsatisfied performance obligations were approximately $36.0 million at March 31, 2024. Management expects approximately $24.2 million to be recognized over the following 12 months, with the remainder over an estimated three years.
- Management expects approximately $1.5 million of capital expenditures over the next 12 months for business development and infrastructure, funded from current operations.
- Borrowing subsidiaries were reported to be in compliance with applicable financial covenants, with no defaults. Several Pakistan facilities carry relatively high interest rates of approximately 19% to 24% and are secured by subsidiary assets.
- Key risks include foreign-currency volatility, concentration in Asia-Pacific and with Daimler Financial Services, long collection cycles, geopolitical and economic uncertainty, inflation, elevated interest rates, Pakistan economic conditions, technology obsolescence, customer implementation timing, and retention of technical personnel.
- Following the SEC’s May 3, 2024 order barring former auditor BF Borgers CPA PC, NetSol dismissed Borgers and engaged Fortune CPA, Inc. Fortune is reviewing the nine months ended March 31, 2024 and will audit fiscal 2024 and re-audit fiscal 2023. The company warns that discrepancies could require amendments to prior financial statements.
Most important facts for investors to verify
- Confirm the March 31, 2024 financial statements and prior-year re-audit results after Fortune CPA completes its review and audit work.
- Assess whether the increase in receivables and contract assets, 172-day days sales outstanding, and negative operating cash flow are temporary or indicate collection and cash-conversion pressure.
- Monitor foreign-exchange gains and losses, particularly the Pakistani rupee exposure, because currency movements materially affected reported earnings.
- Evaluate customer concentration, especially Daimler Financial Services’ contribution and the heavy Asia-Pacific revenue exposure.
- Verify the timing, scope, and collectability of the approximately $36.0 million of remaining performance obligations and the announced contract opportunities.
- Review debt maturities, interest rates, collateral, and covenant compliance at NetSol PK and other subsidiaries.
- Reconcile GAAP earnings with management’s non-GAAP adjusted EBITDA, which excludes interest, taxes, depreciation and amortization, stock-based compensation, and non-controlling-interest effects.