NetSol Technologies, Inc. Form 10-Q Summary
Business Context and Reporting Period
NetSol designs, develops, markets and exports enterprise software, licensing, subscription, support, implementation, consulting and IT services for the automobile financing, leasing, banking and financial-services industries. Its principal offerings include NFS, NFS Ascent, NFS Digital, Otoz and LeasePak.
This unaudited Form 10-Q covers the three months ended September 30, 2020, the first quarter of fiscal 2021. The filing was signed November 16, 2020. Operations are conducted globally through North America, Europe and Asia-Pacific subsidiaries.
Financial Performance and Position
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Total revenue | $12.65 million | $13.57 million | Down 6.8% |
| Gross profit | $6.38 million | $6.11 million | Up 4.4% |
| Gross margin | 50.5% | 45.0% | Up 5.5 percentage points |
| Operating income | $1.04 million | $(0.43) million | Improved $1.46 million |
| Operating margin | 8.2% | (3.1%) | Improved 11.3 percentage points |
| Net income attributable to NetSol | $0.72 million | $(1.83) million | Improved $2.55 million |
| Basic and diluted EPS | $0.06 | $(0.16) | Improved $0.22 |
| Adjusted EBITDA, net | $1.61 million | $(1.08) million | Improved $2.69 million |
Revenue mix shifted materially: license fees declined to $3,475 from $2.46 million, while subscription and support revenue increased to $5.17 million from $4.61 million and services revenue increased to $7.47 million from $6.42 million. Core revenue was $11.05 million, compared with $11.78 million in the prior-year quarter.
Cash flow from operations was $4.71 million, compared with $0.27 million in the prior-year quarter. Investing cash flow was $(0.52) million, primarily reflecting $0.49 million of capital expenditures. Financing cash flow was $0.09 million and included $0.70 million of bank-loan proceeds and $0.46 million used to repurchase shares. Cash and cash equivalents increased to $24.89 million from $20.17 million at June 30, 2020.
At September 30, 2020, current assets were $52.67 million and current liabilities were $19.71 million. Total assets were $83.06 million, total liabilities were $22.53 million, and total stockholders’ equity was $60.53 million. Debt and finance-lease obligations totaled $11.38 million, including $9.68 million due within one year. Operating lease liabilities totaled $2.28 million.
Material Changes Versus the Prior Comparable Period
- Revenue decreased 6.8%, primarily because the prior-year quarter included approximately $2.46 million of revenue related to the Daimler Financial Services contract.
- Subscription and support revenue increased 12.3%, and services revenue increased 16.4%, supporting a more recurring and services-oriented revenue mix.
- Cost of revenue declined 16.0%, driven largely by a $1.24 million reduction in travel expense related to COVID-19 travel restrictions.
- Operating expenses declined 18.2%, reflecting lower selling and marketing, general and administrative, research and development and professional-service costs.
- Foreign-currency results improved from a $1.76 million loss to a $0.30 million gain, substantially contributing to the return to profitability.
- Asia-Pacific remained the largest region at $8.68 million of revenue, or 68.7% of consolidated revenue. Europe increased to $3.15 million from $2.59 million, while North America declined to $0.81 million from $0.98 million.
- The company adopted ASC 326, resulting in a $6.78 million cumulative-effect reduction to equity for expected credit losses, including a full allowance against the $4.25 million WRLD3D convertible note receivable and related accrued interest.
- The company repurchased 147,052 shares for $464,676 during the quarter. Subsequent to quarter-end, it purchased an additional 102,023 shares at an average price of $2.94 per share.
Guidance, Outlook, Risks and Unusual Items
Management did not provide formal revenue or earnings guidance. It expects subscription and support fees to gradually increase as NFS legacy products and NFS Ascent are implemented. Management also stated that NFS Ascent SaaS, cloud demand, digital transformation and the Otoz mobility platform are showing positive momentum.
Management expects approximately $2 million of capital expenditures over the next 12 months for Asia-Pacific, U.S. and European business development and infrastructure enhancements, funded from current operations. Contracted but unsatisfied performance obligations were approximately $55.26 million at September 30, 2020; approximately $11.82 million is expected to be recognized over the next 12 months and the remainder over an estimated five years.
COVID-19 reduced travel and certain operating costs but created recessionary risk, slower automotive-sector activity, delayed customer purchasing decisions and risks associated with office operations. Other disclosed risks include foreign-currency volatility, political and economic conditions in international markets, U.S.-China trade tensions, technology obsolescence, dependence on qualified personnel, customer concentration and uncertainty regarding the timing of software implementations.
Daimler Financial Services and BMW Financial represented 20.6% and 19.7% of quarterly revenue, respectively. The company held approximately $22.1 million of cash at foreign subsidiaries, much of which was uninsured. It remained in compliance with borrowing covenants and reported no defaults or legal proceedings. The $469,721 Paycheck Protection Program loans had not yet been submitted for forgiveness.
Important Facts for Investors to Verify
- Verify the sustainability of the shift from license revenue toward subscription, support and services revenue.
- Assess whether the improved margins and profitability can persist after COVID-related travel savings and favorable foreign-currency movements.
- Review collectability of contract assets and receivables, including the $18.43 million of revenues in excess of billings and the substantial credit-loss allowances recorded under ASC 326.
- Monitor the recoverability of the fully reserved WRLD3D convertible notes and the carrying value of related investments.
- Evaluate customer concentration, particularly Daimler Financial Services and BMW Financial, and the timing of their implementation programs.
- Confirm the company’s ability to fund approximately $2 million of planned capital expenditures while meeting current debt, finance-lease and operating-lease obligations.
- Track compliance with NetSol PK and NTE financial covenants and the refinancing or repayment of revolving facilities.
- Review the effect of continued share repurchases and the company’s stated preference to limit reliance on external capital.