NetSol Technologies, Inc. Form 10-Q Summary
Business Context and Reporting Period
NetSol provides enterprise software, licensing, subscription and support, system integration, consulting, and IT services primarily to the automobile financing, leasing, banking, and financial-services industries. Its principal offerings include NFS Ascent, NFS Digital, Otoz Digital Auto Retail, and legacy LeasePak and LeaseSoft systems.
The filing covers the three and nine months ended March 31, 2022, corresponding to fiscal third quarter and year-to-date fiscal 2022. The request metadata identifies “2021 Q3,” but the filing itself clearly reports fiscal 2022 results. The statements are unaudited.
Key Financial Metrics
| Metric | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | Nine Months Ended March 31, 2022 | Nine Months Ended March 31, 2021 |
|---|---|---|---|---|
| Revenue | $14.81 million | $13.78 million | $43.70 million | $39.55 million |
| Gross profit | $5.83 million | $6.43 million | $18.92 million | $18.85 million |
| Gross margin | 39.4% | 46.6% | 43.3% | 47.7% |
| Operating income (loss) | $(0.54) million | $0.46 million | $0.47 million | $1.59 million |
| Net income (loss) attributable to NetSol | $(0.28) million | $(0.62) million | $1.32 million | $(0.15) million |
| Diluted earnings (loss) per share | $(0.02) | $(0.05) | $0.12 | $(0.01) |
| Adjusted EBITDA, net | $0.36 million | $0.20 million | $3.22 million | $2.43 million |
- Nine-month revenue mix was $3.59 million of license fees, $22.16 million of subscription and support revenue, and $17.96 million of services revenue.
- Subscription and support revenue increased substantially, while license revenue declined. Nine-month subscription and support revenue included approximately $3.48 million of one-time catch-up revenue related to revised post-contract support consideration under the DFS contract.
- Asia-Pacific generated 75.8% of nine-month revenue and 78.4% of quarterly revenue. Daimler Financial Services represented 35.9% of nine-month revenue, and BMW Financial represented 7.3%.
- Cash and cash equivalents were $30.57 million at March 31, 2022, compared with $33.71 million at June 30, 2021. Approximately $29.32 million was held by foreign subsidiaries and was uninsured.
- Current assets were $55.10 million versus current liabilities of $23.60 million, implying substantial reported current-asset coverage of short-term obligations.
- Net cash provided by operating activities was $5.53 million for the nine months, down from $10.39 million in the prior-year period. Capital expenditures were $1.68 million.
- Total loans and finance-lease obligations were $9.75 million, including $9.62 million classified as current and $0.13 million long term. Operating lease liabilities totaled $1.28 million.
Material Changes Versus the Prior Comparable Period
- Quarterly revenue increased 7.4%, but quarterly gross profit declined 9.2% and gross margin fell 720 basis points to 39.4%.
- Quarterly cost of revenues rose to 60.6% of revenue from 53.4%, primarily because of higher salaries and consultant costs, increased travel, repair and maintenance, and computer costs.
- Quarterly operating expenses increased 6.9%, led by higher selling and marketing expense. Operating results shifted from $0.46 million of income to a $0.54 million loss.
- Nine-month revenue increased 10.5%, driven mainly by subscription and support revenue. However, gross margin fell 440 basis points, and operating income declined 70.0% to $0.47 million.
- Nine-month results benefited from foreign-exchange gains of $2.68 million compared with a $1.52 million foreign-exchange loss in the prior-year period. Foreign-exchange gains therefore materially contributed to the improvement in pretax and NetSol-attributable earnings.
- NetSol reported nine-month attributable income of $1.32 million versus a $0.15 million loss in the prior-year period, although $1.66 million of consolidated income was attributable to non-controlling interests.
- Cash declined by $3.13 million during the nine months, primarily reflecting a $6.47 million adverse effect from exchange-rate changes, debt and lease repayments, and capital expenditures.
- Accounts receivable increased to $7.05 million from $4.18 million, while combined accounts receivable and revenues in excess of billings increased to $22.66 million from $19.82 million. Reported average days sales outstanding improved to 133 days from 183 days.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management did not provide formal quantitative revenue or earnings guidance. It expects subscription and support revenue to grow as more legacy and NFS Ascent products go live.
- 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.
- Management cited growing traction for NFS Ascent SaaS, digital transformation, Otoz, customer upgrades, and mobility platforms. The company signed a contract with a Swedish bank and began or continued implementations for customers in Australia, Taiwan, Germany, and other markets.
- Key risks include COVID-19 effects, customer delays in approving new systems, supply-chain constraints affecting automotive customers, travel restrictions, reduced conferences and lead generation, Russia’s invasion of Ukraine, global recession concerns, U.S.-China trade restrictions, political and economic conditions in operating countries, and foreign-currency volatility.
- The company is highly exposed to foreign exchange because significant operations are conducted in Pakistan, the United Kingdom, Europe, China, Thailand, and Australia. Nine-month accumulated translation loss attributable to NetSol was $4.87 million.
- Approximately $4.25 million of convertible notes receivable from related party WRLD3D and $0.70 million of accrued interest were fully reserved. A further $1.24 million related-party receivable was also fully reserved.
- Contracted but unsatisfied performance obligations were approximately $43.39 million at March 31, 2022; management expects to recognize approximately $15.34 million over the next 12 months and the remainder over approximately six years.
- The company stated that it was in compliance with applicable borrowing covenants and had no defaults. Failure to comply could accelerate repayment obligations.
- No legal proceedings or separately disclosed risk-factor updates were reported in Part II. Management concluded that disclosure controls and procedures were effective, with no material changes to internal control over financial reporting.
Most Important Facts for Investors to Verify
- Determine how much of the nine-month subscription and support increase is recurring versus the approximately $3.48 million one-time DFS catch-up adjustment.
- Assess whether the lower gross margin reflects temporary hiring and normalization costs or a sustained increase in delivery costs.
- Monitor concentration risk, particularly Daimler Financial Services’ 35.9% share of nine-month revenue and the concentration of assets and cash in Asia-Pacific and foreign subsidiaries.
- Reconcile reported profitability with the significant contribution from foreign-exchange gains and non-controlling interests.
- Review the collectability and contractual timing of the $22.66 million combined accounts-receivable and unbilled-revenue balance.
- Verify the availability and transferability of foreign-subsidiary cash, including the approximately $29.32 million of uninsured foreign deposits.
- Track current debt maturities of approximately $9.62 million, covenant compliance, refinancing requirements, and the company’s ability to fund planned capital expenditures from operations.