NetSol Technologies, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended December 31, 2021; fiscal second quarter of 2022. The interim financial statements are unaudited. Comparisons are to the corresponding periods ended December 31, 2020, and balance-sheet comparisons are to June 30, 2021.
Business Context
NetSol provides enterprise software, licensing, subscription and support, implementation, consulting, business-process outsourcing, and other IT services primarily to automotive finance, leasing, banking, and financial-services customers. Its principal offerings include NFS Ascent, NFS Digital, Otoz, and legacy LeasePak and LeaseSoft products. Operations are conducted globally through North America, Europe, and Asia-Pacific, with Asia-Pacific representing the majority of revenue.
Key Financial Metrics
| Metric | Three months ended Dec. 31, 2021 | Three months ended Dec. 31, 2020 | Six months ended Dec. 31, 2021 | Six months ended Dec. 31, 2020 |
|---|---|---|---|---|
| Revenue | $15.47 million | $13.12 million | $28.89 million | $25.77 million |
| Gross profit | $7.64 million | $6.04 million | $13.09 million | $12.42 million |
| Gross margin | 49.4% | 46.0% | 45.3% | 48.2% |
| Operating income | $1.65 million | $0.09 million | $1.01 million | $1.12 million |
| Operating margin | 10.7% | 0.7% | 3.5% | 4.4% |
| Net income attributable to NetSol | $1.41 million | $(0.24) million | $1.59 million | $0.48 million |
| Basic and diluted EPS | $0.13 | $(0.02) | $0.14 | $0.04 |
| Adjusted EBITDA, net | $2.09 million | $0.62 million | $2.86 million | $2.23 million |
- Subscription and support revenue increased to $9.37 million for the quarter and $15.61 million for the six months, compared with $5.72 million and $10.90 million, respectively, in the prior-year periods.
- Services revenue declined to $4.14 million for the quarter and $11.32 million for the six months, reflecting implementations nearing completion or going live.
- License-fee revenue declined to $1.96 million for the quarter and $1.97 million for the six months.
- Asia-Pacific generated 79.4% of quarterly revenue and 74.4% of six-month revenue. Daimler Financial Services represented 39.5% of six-month revenue, and BMW Financial represented 5.3%.
- The quarterly earnings improvement included a $901,016 foreign-currency gain and approximately $3.48 million of one-time catch-up post-contract support revenue related to the DFS contract.
Cash Flow, Liquidity, Debt, and Balance Sheet
- Cash and cash equivalents were $25.59 million at December 31, 2021, down from $33.71 million at June 30, 2021. Approximately $23.5 million was held by foreign subsidiaries and was uninsured.
- Operating cash flow was negative $3.04 million for the six months ended December 31, 2021, compared with positive $12.65 million in the prior-year period. The principal uses were increases in accounts receivable and revenues in excess of billings.
- Investing cash flow was negative $0.57 million, including $0.77 million of capital expenditures. Financing cash flow was negative $0.63 million, including $0.72 million of net debt and finance-lease payments and $0.10 million of share repurchases.
- Current assets were $54.09 million versus current liabilities of $21.03 million. Accounts receivable was $7.19 million, while revenues in excess of billings totaled $19.72 million, including $0.99 million classified as long term.
- Total loans and finance-lease obligations were $10.27 million, of which $10.15 million was current and $0.12 million was long term. Operating lease liabilities totaled $1.09 million.
- NetSol reported compliance with its borrowing covenants and no defaults. Management expects to meet obligations at maturity from internal sources.
- Total stockholders’ equity was $60.03 million at December 31, 2021, compared with $61.87 million at June 30, 2021. Accumulated foreign-currency translation losses increased to $34.94 million from $31.87 million.
Material Changes Versus Prior Comparable Period
- Quarterly revenue increased 17.9%, while six-month revenue increased 12.1%.
- Quarterly operating income rose sharply to $1.65 million from $0.09 million; however, six-month operating income declined 9.7% to $1.01 million.
- Quarterly gross margin improved by 3.4 percentage points, but six-month gross margin declined by 2.9 percentage points because cost of revenues grew faster than revenue.
- Quarterly and six-month net income attributable to NetSol improved substantially, although the comparison benefited from foreign-exchange gains, the DFS support-revenue catch-up, and a lower tax rate.
- Operating cash flow deteriorated by $15.69 million year over year, primarily because contract assets and receivables increased. Combined accounts receivable and revenues in excess of billings increased by $7.08 million from June 30, 2021.
- Share repurchases declined to 22,510 shares costing $100,106 during the six months, compared with 446,996 shares costing $1.39 million in the prior-year period.
Guidance, Outlook, Risks, and Unusual Items
- The filing does not provide formal annual revenue or earnings guidance.
- Management expects approximately $2 million of capital expenditures during the next 12 months for Asia-Pacific, U.S., and European business development and infrastructure enhancements, funded from current operations.
- Management reported new or renegotiated opportunities expected to generate more than $4 million from DTFS implementations over four years, more than $10 million of additional DFS support revenue over four years, approximately $0.4 million of additional BMW revenue, and approximately $0.5 million from a new Australian SaaS implementation over five years. These amounts are expectations and remain subject to implementation and contract execution risks.
- Contracted but unsatisfied performance obligations were approximately $46.0 million at December 31, 2021; approximately $16.6 million is expected to be recognized over the next 12 months, with the remainder over an estimated six years.
- Management identified continued SaaS adoption, digital transformation, Otoz demand, customer upgrades, and mobility solutions as positive trends. COVID-19, customer delays, travel restrictions, automotive-sector slowdowns, supply-chain issues, geopolitical and China-related restrictions, foreign-exchange volatility, and difficulty recruiting technical personnel remain risks.
- Revenue recognition depends on estimates of standalone selling prices, project completion, labor requirements, and future implementation timing. Changes in these estimates could affect reported results.
- WRLD3D-related receivables and convertible notes are fully reserved, including $4.25 million of principal and $0.70 million of accrued interest. Equity-method investments generated losses during the period.
- The company reported no legal proceedings, material risk-factor updates, defaults, or material changes in internal controls. Management concluded that disclosure controls were effective.
Investor Verification Priorities
- Verify the sustainability of the revenue increase after excluding the approximately $3.48 million DFS catch-up adjustment and the $2.19 million six-month foreign-exchange gain.
- Monitor conversion of the $19.72 million contract-asset balance and $7.19 million of receivables into billed and collected cash.
- Assess customer concentration, particularly Daimler Financial Services’ 39.5% share of six-month revenue and BMW Financial’s 5.3% share.
- Reconcile expected DFS, DTFS, BMW, and Australian SaaS revenue with executed contracts, implementation milestones, and remaining performance obligations.
- Evaluate the company’s ability to fund planned capital expenditures while operating cash flow remains negative and most cash is held overseas.
- Review foreign-exchange exposure, covenant requirements, and the concentration of debt and operations in Pakistan and other foreign jurisdictions.