NetSol Technologies, Inc. — Form 10-Q Summary
Business Context and Reporting Period
This quarterly filing covers the three and nine months ended March 31, 2016, NetSol’s fiscal third quarter and first nine months of fiscal 2016. NetSol develops and markets software, implementation, consulting, systems integration, and IT services for automobile financing and leasing, banking, and financial-services customers worldwide. Its principal products include NFS, NFS Ascent, LeasePak, LeaseSoft, and LoanSoft. The statements are unaudited.
Financial Performance and Position
| Metric | Three months ended Mar. 31, 2016 | Three months ended Mar. 31, 2015 | Nine months ended Mar. 31, 2016 | Nine months ended Mar. 31, 2015 |
|---|---|---|---|---|
| Revenue | $15.97 million | $13.07 million | $45.47 million | $35.65 million |
| Gross profit / margin | $7.54 million / 47.2% | $4.71 million / 36.1% | $20.98 million / 46.1% | $12.93 million / 36.3% |
| Operating income (loss) | $1.24 million | $(1.63) million | $3.26 million | $(4.88) million |
| Net income (loss) attributable to NetSol | $0.85 million | $(1.64) million | $1.31 million | $(4.84) million |
| EPS, basic | $0.08 | $(0.17) | $0.13 | $(0.51) |
| Net cash from operating activities | Not separately provided | Not separately provided | $1.13 million | $2.57 million |
- Quarterly revenue increased 22.2%; nine-month revenue increased 27.5%.
- Services were the largest revenue stream, at $10.71 million for the quarter and $31.86 million for the nine months, including related-party services of $2.55 million and $7.38 million, respectively.
- Quarterly gross profit increased 60.0%, while the gross margin expanded 11.2 percentage points. Nine-month gross profit increased 62.3%, with a 9.9 percentage-point margin expansion.
- Operating expenses were essentially flat year over year for both the quarter and nine months, improving operating leverage.
- Cash and cash equivalents were $11.88 million at March 31, 2016, down from $14.17 million at June 30, 2015. Current assets were $36.13 million versus current liabilities of $14.39 million.
- Total debt and capitalized lease obligations were $4.85 million, including $4.54 million current and $0.32 million long term, compared with $4.38 million at June 30, 2015.
- Accounts receivable plus revenues in excess of billings increased to $21.40 million from $15.24 million at June 30, 2015. Days sales outstanding rose to 111 days from 96 days.
- Investing cash use was $3.29 million, including $2.52 million of capital expenditures, a $0.56 million investment, and $0.77 million used to purchase subsidiary shares. Financing cash provided was $1.41 million.
Material Changes Versus the Prior Comparable Period
- Asia-Pacific remained the primary revenue contributor, representing 73.4% of quarterly revenue and 76.1% of nine-month revenue. Nine-month Asia-Pacific revenue increased from $26.26 million to $34.60 million.
- Quarterly license revenue increased, partly because of $0.48 million of related-party license revenue, but nine-month license revenue declined to $3.75 million from $4.90 million.
- Maintenance revenue increased modestly, while management expects it to remain relatively stable until additional NFS Ascent customers go live.
- Services revenue increased substantially as a result of new legacy-system and NFS Ascent implementations and additional customization and enhancement work.
- Foreign-currency translation produced a $2.25 million nine-month loss and increased accumulated other comprehensive loss to $18.90 million from $17.17 million.
- Non-controlling interest reduced NetSol’s attributable earnings by $0.31 million in the quarter and $1.38 million for the nine months. NetSol purchased additional NetSol PK shares, reducing the outside ownership percentage from 34.9% to 33.4%.
- The company purchased a 4.9% interest in a non-affiliated private company for $0.56 million and reported no impairment of goodwill.
Guidance, Outlook, Risks, and Unusual Items
- Management stated that its outlook remains optimistic and expects NFS Ascent implementation activity to support further services growth. No formal revenue or earnings guidance was provided.
- Reported contract wins included an NFS Ascent upgrade and implementation contract valued at more than $100 million, an approximately $8 million U.K. NFS Ascent contract, a LeaseSoft contract expected to exceed $2.5 million, and an approximately $1.1 million Australian NFS contract. Contract values are not necessarily recognized as current-period revenue.
- Management expects $1.5 million to $2.5 million of capital expenditures and infrastructure or business-development spending over the next 12 months, funded primarily from operations.
- Key risks include delayed customer collections, elevated receivable balances, foreign-exchange volatility, geopolitical unrest, economic conditions in China and Pakistan, technology obsolescence, dependence on qualified personnel, and the ability to implement and finance growth initiatives.
- Approximately $8.85 million of cash was held by foreign subsidiaries and is intended to remain permanently reinvested outside the United States. Repatriation could create additional U.S. tax obligations.
- The company reported compliance with applicable borrowing covenants and no defaults. Certain facilities are secured by subsidiary assets and could accelerate upon covenant violations or changes in control.
- A federal securities class action concerning the release of NFS Ascent was preliminarily settled in March 2016, subject to final court approval scheduled for June 27, 2016. The company expects insurers to cover the settlement cost. Related shareholder derivative actions in California and Nevada remained subject to settlement discussions, court approval, or dismissal motions.
- The company recorded $0.69 million of stock-based compensation during the nine months and had $4.35 million of remaining expense to recognize through fiscal 2019.
Important Facts for Investors to Verify
- Whether the announced NFS Ascent and other contract awards convert into billings, cash collections, and recognized revenue as expected.
- The collectability and aging of the $21.40 million combined accounts receivable and unbilled-revenue balance, particularly related-party receivables.
- Whether operating cash flow improves from the $1.13 million nine-month level and supports planned capital spending.
- The effect of foreign-exchange movements on earnings, cash, and accumulated other comprehensive loss.
- Final court approval and insurance coverage of the federal class-action settlement, along with the status of the derivative litigation.
- Future dilution from stock grants, options, warrants, and compensation-related share issuances.