NETSOL Technologies, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended June 30, 2020, compared with fiscal year ended June 30, 2019. The request references “2019 Q4,” but the supplied filing is an annual FY2020 Form 10-K, not a quarterly filing.
Business context
NETSOL provides enterprise software, implementation, consulting, maintenance and IT services primarily to automotive finance, leasing, banking and other financial-services customers. Its principal products include NFS Ascent, LeasePak, LeaseSoft and the Otoz mobility platform. Operations are organized into North America, Europe and Asia-Pacific, with approximately 1,400 employees at June 30, 2020.
- Asia-Pacific generated approximately 71.0% of FY2020 revenue; Europe generated 21.1% and North America 7.9%.
- Daimler Financial Services and BMW accounted for 26.4% and 15.8% of revenue, respectively, or approximately 42.2% combined.
- The Company acquired the remaining interest in Virtual Lease Services and became its outright owner.
Financial performance
| Metric | FY2020 | FY2019 | Change |
|---|---|---|---|
| Total revenue | $56.4 million | $67.8 million | Down $11.4 million |
| License revenue | $4.6 million | $16.8 million | Down $12.2 million |
| Maintenance revenue | $19.0 million | $15.5 million | Up $3.4 million |
| Services revenue, including related party | $32.9 million | $35.5 million | Down $2.7 million |
| Gross profit | $27.0 million | $34.9 million | Down $7.9 million |
| Gross margin | 47.8% | 51.4% | Down 3.6 percentage points |
| Operating income | $1.1 million | $6.8 million | Down $5.8 million |
| Operating margin | 1.9% | 10.1% | Down 8.2 percentage points |
| Net income attributable to NETSOL | $0.9 million | $8.6 million | Down $7.6 million |
| Basic and diluted EPS | $0.08 | $0.74 | Down $0.66 |
| Adjusted EBITDA, net | $4.3 million | $12.9 million | Down $8.6 million |
Cash flow, liquidity and debt
- Cash and cash equivalents were $20.2 million at June 30, 2020, compared with $17.4 million at June 30, 2019. Approximately $18.2 million was held by foreign subsidiaries.
- Operating cash flow was $4.0 million, down from $4.9 million. Investing cash flow was negative $2.1 million, and financing cash flow was positive $1.7 million.
- Current assets were $51.9 million versus current liabilities of $20.1 million, implying substantial reported current-asset coverage.
- Accounts receivable plus revenues in excess of billings totaled $29.9 million. Average days sales outstanding increased to 200 days from 171 days.
- Total loans and finance-lease obligations were approximately $10.7 million, including $9.1 million current and $1.5 million long term. Operating lease liabilities totaled $2.5 million.
- Contractual obligations totaled $13.3 million, including $10.4 million due within one year.
- The Company stated that it was in compliance with borrowing covenants and had no defaults. It expected $2 million to $3 million of working capital for the next 12 months.
- The Company had no material off-balance-sheet arrangements and has not paid common-stock dividends since inception.
Material changes versus FY2019
- Revenue declined 16.9%, principally because FY2020 contained substantially less license revenue from the Daimler and BMW NFS Ascent implementations.
- Recurring maintenance revenue increased as more customers went live, partially offsetting lower license and services revenue.
- Gross margin contracted as cost of revenue rose to 52.2% of revenue from 48.6%; technical salaries represented 33.4% of revenue versus 28.4%.
- Operating expenses declined 7.7%, but increased as a percentage of revenue to 45.9% from 41.4%, leaving only $1.1 million of operating income.
- Other income fell to $1.3 million from $6.2 million, primarily because foreign-exchange gains decreased to $0.4 million from $6.3 million.
- Cash increased despite lower earnings, supported by financing proceeds of $4.2 million, lower capital expenditures and working-capital movements.
- The Company adopted the new lease standard on July 1, 2019, recording approximately $3.0 million of right-of-use assets and $3.1 million of lease liabilities; management said the adoption did not materially affect earnings or cash flow.
Guidance, outlook, risks and unusual items
- Management did not provide quantified revenue or earnings guidance in the supplied filing. It expressed optimism regarding NFS Ascent, cloud deployments, SaaS pricing, digital transformation and Otoz.
- All global contracts offer subscription pricing as an alternative to traditional licenses. Management expects SaaS pricing to reduce customer buy-in costs, improve revenue predictability and support volume-based selling.
- Major commercial developments included UK NFS Ascent wholesale and retail cloud agreements, the first North American Ascent customer, additional China deployments, and further rollouts under the Daimler Financial Services agreement.
- COVID-19 reduced travel and marketing activity and created recession-related risks, delays in customer decision-making, automotive-sector weakness and operational risks from remote or disrupted work. Management also identified potentially favorable lower travel and office costs and increased demand for cloud, mobile and digital solutions.
- Customer concentration is material: Daimler and BMW represented approximately 42.2% of FY2020 revenue, although their combined percentage declined from approximately 53.8% in FY2019.
- NETSOL held $4.25 million of convertible notes receivable from related party WRLD3D, including $0.6 million funded during FY2020. The notes were payable on demand and carried interest rates of 5% or 10%; accrued interest was $0.7 million.
- The Company recorded a $0.6 million share of net loss from equity investments, primarily related to WRLD3D.
- After year-end, the Company settled a contract lawsuit for a $100,000 payment. It also authorized a $2 million share-repurchase program and subsequently repurchased 147,052 shares at an average price of $3.16.
- The Company received $469,721 of Paycheck Protection Program loans; forgiveness had not been requested as of June 30, 2020.
- Management reported effective disclosure controls and internal control over financial reporting. The FY2020 audit opinion was unqualified.
Important facts for investors to verify
- Whether the expected Daimler, BMW and other NFS Ascent deployments convert into recognized license, implementation and recurring maintenance or SaaS revenue.
- The collectability and aging of the $29.9 million combined accounts-receivable and contract-asset balance, given 200 days of sales outstanding.
- The liquidity and repatriation constraints associated with approximately $18.2 million of cash held by foreign subsidiaries.
- The maturity, refinancing and covenant requirements for approximately $10.7 million of loans and finance leases, including substantial current maturities.
- The recoverability of the $4.25 million related-party convertible notes and the $2.4 million equity investment balance, including WRLD3D-related risks.
- The impact of COVID-19, automotive-sector weakness, foreign-exchange volatility and customer concentration on future revenue and margins.
- The timing and economics of the authorized share repurchase program and any resulting effect on share count and liquidity.