NetSol Technologies, Inc. — Form 10-Q Summary
Business context and reporting period
NetSol designs, develops, markets and exports enterprise software and related system integration, consulting and IT services for automobile financing and leasing, banking and financial-services customers worldwide. Its principal offerings include NFS Ascent, cloud and subscription solutions, NFS Digital, Otoz and legacy platforms. This unaudited report covers the three months ended September 30, 2021, the first quarter of fiscal 2022, compared with the three months ended September 30, 2020. The company reports North America, Europe and Asia-Pacific segments.
Key financial metrics
| Metric | Q1 FY2022 | Q1 FY2021 | Change |
|---|---|---|---|
| Total revenue | $13.421 million | $12.647 million | +6.1% |
| Subscription and support revenue | $6.230 million | $5.172 million | +20.5% |
| Services revenue | $7.180 million | $7.472 million | -3.9% |
| Gross profit | $5.443 million | $6.382 million | -14.7% |
| Gross margin | 40.6% | 50.5% | -9.9 percentage points |
| Operating income (loss) | $(0.640) million | $1.037 million | Declined $1.676 million |
| Net income | $0.550 million | $1.123 million | -51.0% |
| Net income attributable to NetSol | $0.188 million | $0.718 million | -73.8% |
| EPS, basic and diluted | $0.02 | $0.06 | Declined $0.04 |
| Adjusted EBITDA, net | $0.770 million | $1.611 million | -52.2% |
Revenue increased primarily from higher subscription and support fees. Asia-Pacific generated $9.218 million, or 68.7% of revenue; Europe generated $3.273 million, or 24.4%; and North America generated $0.930 million, or 6.9%.
Cost of revenues increased to $7.978 million from $6.266 million, driven principally by higher salaries and consultant costs, increased travel, depreciation and amortization, and other costs. Management identified a one-time hosting cost of approximately $302,000 within other costs. Operating expenses increased 13.8% to $6.083 million, including higher general and administrative and research and development expenses.
Other income was $1.358 million, including a $1.284 million foreign-currency gain, compared with $0.351 million in the prior-year quarter. This gain substantially offset the operating loss. The effective tax rate was 23.3%, compared with 19.0% in the prior-year quarter.
Cash flow, liquidity and debt
- Cash and cash equivalents were $27.000 million at September 30, 2021, down from $33.705 million at June 30, 2021. Approximately $25.2 million was held by foreign subsidiaries and was uninsured.
- Operating cash flow was negative $3.392 million, compared with positive $4.712 million in the prior-year quarter. The decline reflected increases in accounts receivable, revenues in excess of billings and lower unearned revenue.
- Investing cash flow was negative $0.196 million, including $0.216 million of capital expenditures.
- Financing cash flow was negative $0.464 million, including $0.363 million of net loan and finance-lease payments and $0.100 million of share repurchases.
- Current assets were $52.145 million versus current liabilities of $21.010 million, implying a current ratio of approximately 2.5x.
- Total loans and finance-lease obligations were $10.820 million, of which $10.423 million was current and $0.397 million was long term. Operating lease liabilities totaled $1.267 million.
- Accounts receivable plus revenues in excess of billings increased to $23.177 million from $19.822 million at June 30, 2021. Average days sales outstanding improved to 147 days from 200 days in the comparable prior-year period.
- Management expects approximately $2 million of capital expenditures over the next 12 months for business development and infrastructure, funded from current operations.
Material changes versus the prior comparable period
- Revenue grew 6.1%, led by a 20.5% increase in subscription and support revenue, while services revenue declined 3.9% and license revenue remained immaterial.
- Gross margin contracted sharply from 50.5% to 40.6%, primarily because cost of revenues increased substantially faster than revenue.
- The company moved from operating income of $1.037 million to an operating loss of $0.640 million.
- Net income attributable to NetSol fell to $0.188 million from $0.718 million, and adjusted EBITDA, net, declined to $0.770 million from $1.611 million.
- Foreign-currency results shifted from a $0.875 million net translation gain in other comprehensive income in the prior-year quarter to a $2.145 million net translation loss. Accumulated translation losses increased to $34.014 million.
- Cash flow from operations changed from a $4.712 million inflow to a $3.392 million outflow.
- The company repurchased 22,510 shares for $100,106 during the quarter and issued 1,985 shares valued at $12,009 for director services.
Guidance, outlook, commentary and risks
Management did not provide formal revenue or earnings guidance. It reported positive trends in demand for NFS Ascent SaaS, cloud deployment, digital transformation and the Otoz platform. During the quarter, NetSol generated approximately $1.5 million from customer change requests, went live with NFS Ascent and NFS Ascent Digital in New Zealand, began an NFS Ascent implementation in India for Daimler Financial Services, continued onboarding Otoz dealers, and renegotiated annual support contracts that are expected to produce approximately $1.0 million of additional support revenue over the contract terms.
Management cited COVID-19 uncertainty, customer and automotive-sector slowdowns, supply-chain issues, delayed purchasing decisions, travel restrictions, reduced industry events, geopolitical and trade risks involving the United States, China and Pakistan, and foreign-currency volatility. A significant portion of the company’s operations is outside the United States, creating exposure to political, economic, legal, tax, currency and cash-repatriation risks.
Daimler Financial Services represented 26.4% of quarterly revenue and BMW Financial represented 6.6%, creating customer concentration. The company carries fully reserved related-party amounts, including $4.250 million of convertible notes receivable and related accrued interest, and related-party receivables and contract assets. Management stated that all borrowing covenants were satisfied and no defaults existed. Legal proceedings and material risk-factor updates were reported as none in Part II, although ordinary-course claims and tax assessments remain possible.
Investor verification checklist
- Verify whether subscription growth can continue while services revenue and gross margin recover from the quarter’s decline.
- Assess the sustainability and volatility of the $1.284 million foreign-currency gain and the effect of future currency movements on reported earnings and equity.
- Review the conversion of the $17.133 million contract-asset balance and the $44.366 million of remaining performance obligations into billed revenue and cash.
- Evaluate customer concentration, particularly Daimler Financial Services and BMW Financial, and the impact of automotive-sector conditions.
- Confirm the collectability and future treatment of fully reserved related-party receivables, convertible notes and investment balances.
- Monitor operating cash flow, foreign-subsidiary cash availability, uninsured deposits and the planned $2 million of capital expenditures.
- Review debt maturities, secured subsidiary facilities, financial covenants and potential acceleration upon covenant breach or a change in control.
- Consider the effect of COVID-19, geopolitical and trade restrictions, employee availability, technology competition and foreign-exchange exposure on future results.