NetSol Technologies, Inc. — Form 10-Q Summary
Business context and reporting period
NetSol provides enterprise software, licensing, subscription and support, system integration, consulting, cloud, digital retail and mobility solutions to automobile financing, leasing, banking and financial-services customers worldwide. Its principal products include NFS Ascent, NFS Digital, Otoz and the AppexNow marketplace.
This unaudited Form 10-Q covers the fiscal quarter and six months ended December 31, 2023, compared with the corresponding periods ended December 31, 2022. The company is a smaller reporting company and reports three geographic segments: North America, Europe and Asia-Pacific.
Key financial metrics
| Metric | Three months ended Dec. 31, 2023 | Three months ended Dec. 31, 2022 | Six months ended Dec. 31, 2023 | Six months ended Dec. 31, 2022 |
|---|---|---|---|---|
| Net revenues | $15.24 million | $12.39 million | $29.48 million | $25.10 million |
| Gross profit | $7.18 million | $3.14 million | $13.34 million | $7.39 million |
| Gross margin | 47.1% | 25.4% | 45.2% | 29.5% |
| Operating income (loss) | $1.03 million | $(3.05) million | $1.38 million | $(4.94) million |
| Net income (loss) attributable to NetSol | $0.41 million | $(2.09) million | $0.44 million | $(2.71) million |
| EPS, basic and diluted | $0.04 | $(0.19) | $0.04 | $(0.24) |
| Net cash provided by operating activities | Not separately provided | Not separately provided | $0.60 million | $1.69 million |
Quarterly revenue increased approximately 23.0%, while six-month revenue increased approximately 17.5%. License fees were $2.99 million for the quarter and $4.27 million for the six-month period. Subscription and support revenue was $6.83 million for the quarter and $13.34 million for six months. Services revenue was $5.42 million for the quarter and $11.87 million for six months.
Asia-Pacific generated 74.2% of quarterly revenue and 73.2% of six-month revenue. Daimler Financial Services represented 25.9% of quarterly revenue and 25.9% of six-month revenue. Management reported that a new NFS Ascent CMS sale to a U.S. auto manufacturer based in China contributed approximately $2.8 million of license revenue during the quarter and six-month period.
Financial position, cash flow and debt
- Cash and cash equivalents were $15.66 million at December 31, 2023, compared with $15.53 million at June 30, 2023. Approximately $14.5 million was held by foreign subsidiaries.
- Current assets were $40.08 million and current liabilities were $17.81 million, implying a current ratio of approximately 2.25x.
- Accounts receivable declined to $5.98 million from $11.71 million at June 30, 2023, while revenues in excess of billings increased to $17.03 million from $12.38 million. Combined receivables and contract assets declined to $23.01 million from $24.09 million.
- Operating cash flow was $0.60 million for the six months, down from $1.69 million in the prior-year period. Working-capital movements included a $5.72 million benefit from accounts receivable and a $4.24 million use from revenues in excess of billings.
- Investing cash flow used $0.57 million, primarily for property and equipment purchases. Financing cash flow used $0.03 million, primarily for debt and finance-lease payments.
- Loans and obligations under finance leases totaled $6.08 million, including $5.98 million current and $0.10 million long-term. Operating lease liabilities totaled $1.71 million.
- Management stated that the company and its subsidiaries were in compliance with applicable borrowing covenants and had no defaults.
Material changes versus the prior comparable period
- Gross margin improved substantially because cost of revenues declined to 52.9% of revenue from 74.6% in the quarter and to 54.8% from 70.5% for six months.
- Operating results turned profitable: quarterly operating income was $1.03 million versus a $3.05 million loss, and six-month operating income was $1.38 million versus a $4.94 million loss.
- Subscription and support revenue increased modestly, while services revenue declined due to lower fees from current implementations.
- Foreign-currency results deteriorated. The company recorded a quarterly foreign-exchange loss of $14,617 and a six-month loss of $148,870, compared with prior-year gains of $657,223 and $1.97 million, respectively.
- Interest expense increased to $0.29 million for the quarter and $0.57 million for six months, compared with $0.20 million and $0.32 million, respectively.
- Net income attributable to non-controlling interests was $0.57 million for the quarter and $0.83 million for six months, reducing the portion of consolidated earnings attributable to NetSol shareholders.
- Accumulated other comprehensive loss remained significant at $45.87 million, although it improved from $45.98 million at June 30, 2023, primarily because of foreign-currency translation effects.
Guidance, outlook, commentary and risks
The filing does not provide formal revenue or earnings guidance. Management expects recurring subscription and support revenue to increase gradually as legacy products and NFS Ascent implementations go live. Contracted but unsatisfied performance obligations totaled approximately $32.82 million at December 31, 2023; management expects to recognize approximately $18.47 million over the next 12 months and the remainder over approximately three years.
Management highlighted a contract with an auto captive finance company based in China expected to generate approximately $12 million over five years, more than $1.7 million of customer-requested modifications, a DFS launch in Taiwan, and new customer activity for the Flex and Hubex products. The company expects approximately $1.5 million of capital expenditures over the next 12 months for business development and infrastructure, funded from current operations.
Material risks include foreign-currency volatility, political and economic instability in Pakistan and other operating regions, inflation and higher interest rates, geopolitical conflicts and trade tensions, global recession risk, customer concentration, execution and project-estimation risk, dependence on key personnel, technology obsolescence, and the timing of customer implementations. Approximately 93% of cash was held by foreign subsidiaries and approximately $14.5 million of foreign deposits were uninsured as of December 31, 2023.
The company stated that there were no material changes to previously disclosed risk factors, no material legal proceedings, and no material changes to internal control over financial reporting. Management concluded that disclosure controls and procedures were effective.
Most important facts for investors to verify
- Whether the substantial improvement in gross margin is sustainable after the unusually large license contribution and the full amortization of certain capitalized software costs.
- The timing and collectability of the $17.03 million revenues-in-excess-of-billings balance and the conversion of contracted performance obligations into billable revenue and cash.
- Customer concentration, particularly Daimler Financial Services at 25.9% of quarterly and six-month revenue.
- Foreign-subsidiary cash availability, uninsured deposits, currency exposure and the effect of Pakistani interest rates on borrowing costs.
- Compliance with subsidiary debt covenants and repayment of approximately $5.98 million of current debt and finance-lease obligations.
- Progress on the reported $12 million China contract, NFS Ascent cloud adoption, Otoz and AppexNow commercialization, and the company’s ability to fund planned capital expenditures from operations.