NetSol Technologies, Inc. Form 10-Q Summary
Business Context and Reporting Period
NetSol Technologies provides enterprise software, licensing, subscription, support, implementation, consulting, business-process outsourcing and IT services primarily to the automobile finance, leasing, banking and financial-services industries. The company operates through North America, Europe and Asia-Pacific segments.
This unaudited Form 10-Q covers the quarter and six months ended December 31, 2020, compared with the corresponding periods ended December 31, 2019. The company’s fiscal year ends June 30.
Financial Performance and Position
| Metric | Three Months Ended Dec. 31, 2020 | Three Months Ended Dec. 31, 2019 | Six Months Ended Dec. 31, 2020 | Six Months Ended Dec. 31, 2019 |
|---|---|---|---|---|
| Revenue | $13.1 million | $15.7 million | $25.8 million | $29.3 million |
| Gross profit | $6.0 million | $7.8 million | $12.4 million | $13.9 million |
| Gross margin | 46.0% | 49.7% | 48.2% | 47.5% |
| Income from operations | $0.1 million | $0.7 million | $1.1 million | $0.3 million |
| Net income attributable to NetSol | $(0.2) million | $0.6 million | $0.5 million | $(1.2) million |
| EPS, basic and diluted | $(0.02) | $0.05 | $0.04 | $(0.11) |
| Adjusted EBITDA, net | $0.6 million | $1.6 million | $2.2 million | $0.5 million |
Six-month revenue consisted primarily of services of $12.3 million, subscription and support of $10.9 million, and license fees of $2.6 million. Recurring subscription and support revenue increased, while implementation and other services revenue declined.
At December 31, 2020, cash and cash equivalents were $32.0 million, compared with $20.2 million at June 30, 2020. Current assets were $52.9 million and current liabilities were $21.7 million. Net cash provided by operating activities was $12.7 million for the six months ended December 31, 2020, compared with $3.8 million in the prior-year period.
Total debt and finance lease obligations were $11.9 million, including $10.4 million current and $1.6 million long term. Operating lease liabilities totaled $2.1 million. The company reported compliance with applicable borrowing covenants and no defaults.
Material Changes Versus the Prior Comparable Period
- Quarterly revenue decreased 16.4% to $13.1 million, primarily because services revenue declined $5.5 million. License revenue increased substantially due to approximately $2.4 million recognized from a Chinese customer upgrade agreement, and subscription and support revenue increased $0.6 million.
- Six-month revenue decreased 11.9% to $25.8 million, with services revenue down $4.5 million and subscription and support revenue up $1.2 million.
- Quarterly gross margin declined to 46.0% from 49.7%, primarily reflecting lower revenue and higher salaries and consultant costs as a percentage of sales. Six-month gross margin improved to 48.2% from 47.5%.
- Quarterly operating income declined to $86,503 from $704,990, while six-month operating income increased to $1.1 million from $277,780 because operating expenses fell more rapidly than revenue.
- The company reported a quarterly net loss attributable to NetSol of $242,104, compared with net income of $585,975. For the six-month period, it returned to profitability, reporting $475,450 compared with a prior-year loss of $1.2 million.
- Operating cash flow increased by $8.9 million year over year, supported by collections and reductions in accounts receivable and revenues in excess of billings.
- The company repurchased 446,996 shares for $1.4 million during the six months. The board’s $2.0 million repurchase authorization was extended through June 28, 2021.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide formal revenue or earnings guidance. Management expects recurring subscription and support fees to increase as additional legacy and NFS Ascent implementations go live. Management also cites increasing demand for cloud, SaaS, mobility and digital-transformation solutions, including positive interest in the OTOZ platform.
Management expects approximately $2.0 million of capital expenditures over the next 12 months for business development activities and infrastructure enhancements, funded from current operations. Contracted but unsatisfied performance obligations were approximately $48.3 million at December 31, 2020; approximately $12.9 million was expected to be recognized over the next 12 months.
- COVID-19 reduced travel, conferences and customer decision-making speed and contributed to uncertainty in the automotive and OEM sectors, although lower travel and office costs benefited expenses.
- Foreign currency movements, particularly involving the Pakistani rupee, can materially affect reported revenue, expenses and comprehensive income. The company recorded a six-month foreign-exchange gain of $310,022 versus a $1.7 million loss in the prior-year period.
- Customer concentration is significant: Daimler Financial Services and BMW represented 21.0% and 11.8%, respectively, of six-month revenue.
- The company adopted the expected-credit-loss standard on July 1, 2020, recording a $6.8 million cumulative-effect reduction to equity. The adjustment included a full allowance for $4.25 million of convertible notes receivable from related party WRLD3D and related accrued interest.
- Cash held by foreign subsidiaries was approximately $28.9 million of the total $32.0 million, and approximately $29.0 million of foreign deposits were uninsured.
- Management identified technology obsolescence, dependence on qualified personnel, third-party technology availability, geopolitical conditions, foreign exchange, COVID-19 effects and changing automotive-sector demand as material risks.
Important Facts for Investors to Verify
- Whether the reported $9.0 million China upgrade contract and $1.0 million LeasePak contract convert into expected billings, cash collections and recognized revenue.
- The sustainability of higher recurring subscription and support revenue as implementation activity and services revenue decline.
- Recoverability of WRLD3D-related investments and receivables, including the $4.25 million note allowance and cessation of interest accrual.
- Cash accessibility and liquidity at foreign subsidiaries, including uninsured deposits and subsidiary-level borrowing restrictions.
- Exposure to Daimler Financial Services, BMW and other concentrated customers, as well as the effect of foreign currency movements on future results.
- Progress on the $2.0 million capital expenditure plan, share repurchases and the company’s ability to fund obligations and growth from operating cash flow.