Earnings Call: Q4 2021

Sep 28, 2021

Good afternoon. Welcome to the NetSol Technologies Fiscal 4th Quarter and Full Year 2021 Earnings Conference Call. On the call today are Najeeb Ghauri, Chairman and Chief Executive Officer Roger Almond, Chief Financial Officer Paddy MacLesson, General Counsel and Murat Begg, CIO of OTOZ. I would now like to turn the conference over to Patty MacGlassen, who will provide the necessary cautions regarding the forward looking statements made by management during this call. Please proceed. Good afternoon, everyone, and thank you for joining us. Following a review of the company's business highlights and financial results, we will open the call for questions. I'll now provide the necessary cautions regarding the forward looking statements made by management during this call. Please note that all the information discussed on today's call is covered under the Safe Harbor provisions of the Private Securities Litigation Reform Act. The company's discussion may include forward looking statements reflecting management's current forecast of certain aspects of the company's future and of our actual results, and our actual results could differ materially from those stated or implied. These forward looking statements are qualified by the cautionary statements contained in NetSol's press releases and SEC filings, including our annual report on Form 10 ks and quarterly reports on Form 10 Q. I would also like to point out that we will be discussing certain non GAAP measures. The press release issued earlier today contains a reconciliation of these non GAAP financial results to their most comparable GAAP measures. Additionally, the company has posted a presentation to accompany the remarks we plan to make on today's call in the Investors section of our corporate website. Finally, I would like to remind everyone that this call will be recorded and made available for replay at www.netsaltech.com and via link available in today's press release. Now, I would like to turn the call over to Najeeb. Najeeb? Thank you, Perry, and good afternoon. As I speak to you today, we find ourselves close to being on the other side of what has been an eventful 18 months for everyone. Of course, we are continuing to monitor the latest developments and the potential impact from the COVID-nineteen delta variant, I do think we are close to seeing light at the end of the tunnel. I'm calling in today from our Calabas headquarters, where we're still working at a reduced capacity. Over the past few months, we have implemented a staggered alternate day and office plan that has allowed us to keep moving along without missing a beat. Our offices around the globe are continuing to operate and I know I speak to our entire organization when I say I'm looking forward to a time soon when we can all be back together. Looking at our operations, While we are still facing a number of industry and macroeconomic headwinds, we continue to make incremental progress across our business regions as a global economy and broader leasing and financing industry slowly but surely begins to reopen. Looking at the headline numbers, we improved our top line performance in each quarter of the year, All while making significant adjustments to our spending in the face of a travel restricted sales environment. Our owner centric emphasis on managing the business has yielded positive results in several key areas highlighted by a 154% increase in operating income for the year and a record cash position of nearly $34,000,000 Additionally, subscription and support revenues have now eclipsed and A $20,000,000 annual run rate, further validating our investment in a recurring revenue model and providing us stronger visibility into future performance as well. And while we are continuing to pursue high value larger deals with incumbent OEMs, our ability to grow a healthy recurring revenue base will allow us to grow our business more predictably over time, while still maintaining the opportunity for upside. We also generated over $2,500,000 during the period and more than $7,700,000 throughout fiscal 2021 by successfully implementing change requests from various customers across multiple regions. These kind of data points support our belief that the long term industry trends remain in our favor and we have a diversified approach to growth that is now starting to materialize as the world begins to reopen. Looking ahead with a leaner cost structure to support increased sales and marketing activities, We are making investments to build for long term success in our key growth markets. We are also entering fiscal 2022 with a record cash position of nearly $34,000,000 and we'll be looking to deploy our significant resources made earlier in the year, we've been able to improve our lead generation processes. Our North American and European pipelines have shown continued outsized promise and we are now starting to see some of these pending deals come to fruition, most notably shown by our first NFS Ascent contract in the U. S, which we announced back in August. The pandemic has made it clear that all businesses need to have a sound digital strategy and we are confident that we will benefit from this transition as customers continue to transform processes and future proof their businesses. I'll now hand the call over to our CFO, Roger Amann, who will walk us through the financial results for the quarter year. After that, I'll provide an operational update and outlook before turning the call over to questions. Roger? Thanks, Najeeb. Turning to our fiscal Q4 and full year 2021 financial results for the period ended June 30, Our total net revenues for the Q4 of fiscal 2021 were $15,400,000 compared with $13,600,000 in the prior year period. The increase in total net revenues was primarily driven by an increase in total license fees of $1,000,000 an increase in subscription and revenue of $212,000 and an increase in total services revenue of $564,000 For all of fiscal 2021, total net revenues were $54,900,000 compared to $56,400,000 in fiscal 2020. The decrease in total net revenues was primarily due to a decrease in services revenue of $6,400,000 which was offset by increases in subscription and support revenues of $1,900,000 and license fees of 3,000,000 Total license fees in Q4 were $1,500,000 compared to $530,000 in prior year period. For the full year, total license fees were $6,200,000 compared to $3,300,000 in fiscal 2020. The increase in license fees for both the quarter year was primarily due to revenue being recognized from contracts to implement our NFS Ascent Retail platform. Total subscription and support revenues in Q4 were $5,600,000 compared to $5,400,000 in the prior year period. Segment. For the year, total subscription and support revenues were $22,200,000 compared to $20,300,000 in the prior fiscal year. The increase in total subscription and support revenues for the year was a result of several customers who went live with our product in fiscal 2021. We anticipate subscription and support revenue to gradually increase as we implement both our NFS legacy product and NFS Ascent. Total services revenue for the quarter were $8,200,000 compared to $7,700,000 in the prior year period. For the full year, total services revenues were $26,500,000 compared to $32,900,000 in the prior fiscal year. The increase in services revenues for the quarter was a result of services provided for a major contract that was entered into during fiscal Q2 as well as additional services revenue recognized for our ongoing 12 country contract with a German auto manufacturer. The decrease in services revenue for the year is due to the decrease in implementation revenue associated with customers who have gone live with our products. Services revenue is derived from services provided to both current customers as well as services provided to new customers as part of the implementation process. Total cost of revenues was $7,900,000 for the 4th quarter, an increase of $1,300,000 from 6 point $6,000,000 in the Q4 of 2020. For fiscal year 2021, cost of revenues was $28,600,000 and Company, a decrease from $29,400,000 in fiscal 2020. The increase in cost of sales for the quarter were primarily due to increases in salaries and consultant fees of $885,000 depreciation of $104,000 and other costs of $289,000 The decreases in cost of sales for the year were primarily due to decrease in travel expenses of $3,500,000 offset by increases in salaries and consultant fees of $2,100,000 Gross profit for the Q4 of fiscal 2021 was $7,500,000 or 48.8 percent of net revenues compared to $7,000,000 or 51.8 percent of net revenues in the Q4 of fiscal 2020. And Company. Gross profit for fiscal 2021 increased to $26,400,000 or 48 percent of net revenues compared with $27,000,000 or 47.8 percent of net revenues in fiscal 2020. The increase in gross profit for the quarter was primarily due to increases in revenue, offset by increases in cost of sales of $1,300,000 The decrease in gross profit for the year was primarily due to a decrease in revenue offset by decrease in cost of sales of $841,000 Operating expenses for the 4th quarter increased 8.7 percent to $6,400,000 or 41.4 percent of sales from $7,900,000 or 43 0.2 percent of sales in the same period last year. Operating expenses for fiscal 2021 decreased and Company. 8.7 percent to $23,600,000 or 43 percent of net revenues and $25,900,000 or and the Company's Q4 of fiscal 2020. The increase in operating expenses for the quarter was primarily due to and Marketing and Research and Development, slightly offset by decrease in general and administrative expenses. The decrease in operating expenses for the year was primarily due to decreases in general and administrative expenses and research and development costs and then offset by a slight increase in selling and marketing expenses. Turning to our profitability metrics, our net income from operations was $1,100,000 for the 4th quarter, a decrease from a net income from operations of $1,200,000 in Q4 last year. Net income from operations for the full year was $2,700,000 and increase in net income from operations of $1,100,000 in fiscal year 2020. Our GAAP net income attributable to NetSol for the Q4 of fiscal 2021 totaled $1,900,000 or $0.17 per diluted share. This compares with GAAP net income of $1,200,000.10 per diluted share in the Q4 of last year. GAAP net income attributable to NetSol for fiscal 2021 totaled $1,800,000 or $0.15 per diluted share, and this is compared to net income of $937,000 or $0.08 per diluted share for fiscal 2020. The increase in GAAP net income attributable to NetSol for both the quarter the year was primarily due to the increases in revenues previously mentioned at a greater rate than our related costs to support those revenues. As mentioned on previous calls, it's important to point out that included in our Income this quarter was a gain of $917,000 on foreign currency exchange transactions compared to a gain of $327,000 in Q4 of last year. For the full year, we experienced a loss of $597,000 compared to a gain of $399,000 for all of 2020. Because we operate in several geographical regions, a significant portion of our business is connected in currency translation in the U. S. Dollar. The decrease in the value of the U. S. Dollar compared to foreign currency exchange rates generally has the effect of increasing our revenues, and it also increases our expenses denominated in currencies other than the U. S. Dollar. Similarly, as the U. S. Dollar gains strength relative to foreign currency exchange rate. It tends to reduce our revenues, but it also reduces our expenses denominated in currencies other than the U. S. Dollar. We plan our business accordingly by deploying additional resources to areas of expansion, while continuing to monitor our overall expenditures given the economic uncertainties of target markets. Moving to our non GAAP metrics, our non GAAP adjusted EBITDA for the Q4 of fiscal 2021 totaled 2,900,000 or $0.26 per diluted share compared with non GAAP adjusted EBITDA of $2,000,000 or $0.17 per diluted share in the Q4 of last year. For the full fiscal year 2021, non GAAP adjusted EBITDA totaled $5,400,000 or $0.47 per diluted share compared with $4,300,000 or $0.37 per diluted share in fiscal 2020. Please see the reconciliation schedules contained in our earnings release for our revised calculations of adjusted EBITDA for the fiscal year ended June 30, 2021. Turning to our balance sheet. At quarter end, we had cash and cash equivalents of approximately $33,700,000 or approximately $2.93 per diluted common share, which was up from $20,200,000 or approximately $1.71 per diluted common share at June 30, 2020. On July 30, 2020, NetSol's Board of Directors approved a stock repurchase program that authorized potential repurchases of up to $2,000,000 of its common stock over a 6 month period. All shares permitted to be purchased under this and the 2019 plan were purchased during the plan's original date and prior to the conclusion of extension of the plan. On May 21, 2021, the Board of Directors authorized an additional repurchase plan of up to $2,000,000 worth of shares of common stock through November 20, 2021. Under the program, the company may repurchase its common stock in the open markets from time to time and announced at prices and at such times as the company deems appropriate subject to market condition and federal and state laws governing such transactions. Expects to fund the repurchase with its existing cash balance and cash generated from operations. As of June 30, 2021, we had purchased 669,018 shares of our common stock at an aggregate value of 2,003 and $64,781 One final note before I hand the call back over to Najeeb. On a go forward basis, the company will now be and Company's financial guidance for select key performance metrics. For the fiscal year ending June 30, 2022, the company expects total revenues to increase by at least 10% and subscription and support for recurring revenues increased by at least 20%. Company's guidance is based on existing contracts and recurring revenue from its current customer base, performance results tracked through August of this calendar year and other information available as of the date of this call. That concludes my prepared remarks. I'll now turn the call back over to Najeeb. Najeeb? Thank you, Roger. From a high level, I'd like to outline the fundamental components of our growth strategy. Firstly, we have a continued focus on organic growth within the core business. Subscription and support revenue reached $22,200,000 for fiscal 2021, a nearly 10% increase over the prior year and a $23,000,000 plus run rate projected over the coming 12 months. With each new customer we sign, we add to our recurring revenue, which drives both the top and the bottom line. As we layer on post contract support through larger traditional enterprise contract and increase our SaaS based footprint. We expect to build this base over time, which provides more predictable revenues with a more Interactive Margin Profile. Our initial 2022 guidance for 10% top line growth and 20% ARR growth underscores our belief in this approach. Moving on to the second component of our strategy, We are innovating in new areas and looking to create partnerships with technology and personnel, which can be a major benefit to other organizations as as our own. To this end, I'd like to take some time to provide a brief update on our progress within the auto's innovation lab. Perhaps the most exciting recent development has been the launch of the auto digital automotive retail platform, which we announced in a few months ago. Autos has been working with BMW Group Financial Services through its key brand Mini Anywhere to provide Mini USA customers with a fully digital shopping experience, empowering their marketing strategy and creating a new automated sales channel for dealerships and lenders. The development of Mini Anywhere started when both Mini USA and Mini Financial Services came together during the pandemic looking for an end to end digital contracting solution for MINI's 100 plus dealers in the U. S. After a search for an off the shelf solution came up empty, the 2 entities decided a custom platform was needed to bridge several complicated gaps in the automotive retail process. Many USA and many financial services teamed up with OTOZ, which has developed the platform as a true end to end and e commerce experience. For many dealers, the tool can be set up in as little as 60 minutes and is supported by auto's dedicated success team that provides online and on-site onboarding and training services. Since its launch in late May of this year, The new platform has quickly gained traction. Mini Anywhere is now live with 5 Mini Dealerships in California. Autos is also scheduled to onboard additional California based dealers before an expansion into Florida next. Long term, the solution has the potential to be rolled out to all MINI dealerships in the United States. We appreciate many belief in our product and team and are looking forward to the expansion of our regional partnerships. We believe the potential for this mini anywhere retail platform is limitless. Our mission is no less than to be an early leader in this and the global global market. Digital will be the go to channel for auto sales and we are setting benchmark for its adoption through cutting edge technology and by building compelling customer journeys. The final component of our strategy is exploring atorganic growth opportunities where it makes sense. On this note, I can share We are continuing to evaluate opportunities in the marketplace that are highly accretive and complementary to our business. With this overview completed, I will now get into our operational updates from this quarter. Starting in the Asia Pacific or APAD region, With the previously announced 12 country $110,000,000 contract with Daimler Financial Services, we are continuing to make considerable progress along our multi year, multi country implementation roadmap. In August, we officially went live with the CMS module in New Zealand. Today, we are live in 10 of the 12 markets and are making progress on the remaining deliverables in accordance with our customer timelines. During the last quarter, we also recognized almost $1,400,000 associated with service provided under a restructured contract as a result of organizational changes. In fiscal Q4, we also officially went live with 1 of the subsidiaries of a Japanese equipment finance company of Kubota Tractors in New Zealand. This multimillion dollar contract with implementation of our flagship Ascent Retail solution had been signed pre COVID and was a major effort across our global organization to support. Finally, our recently announced multiyear, multimillion dollar upgrade with GSE Safinco, a global automotive financial service company in China continues to move forward. Based on additional implementation considerations, we are currently anticipating a fall 2023 go live. Moving next to our European countries or NTE. Europe and North America remain exciting new growth areas for NetSol. We are strategically marketing our cloud and SaaS based offering, specifically in these regions, which are contributing to the growing subscription and support revenues noted earlier. From a total contract size perspective, Some of the highest value opportunities are currently coming out of our NTE region. Furthermore, NTA and NTE combined now represent a larger pipeline of contract opportunities compared to APAC and that gap has widened over the last quarter. Many potential opportunities are progressing through the deal stage and we are looking forward to providing more material updates here in the coming months. Finishing with our North American operations on RNTA, in fiscal 2021, we made several key strategic hires with the goal of investing more meaningfully in the growth market. In this growth market with the appointments of James Fredo and NTA's new Vice President of Sales and Peter Minschol, Executive Vice President, we have a solid team with strong industry relationships We recently announced the first official sale and NFS Ascent in the U. S. Market, an agreement with Motorcycle Group to deploy the cloud based version of our flagship platform across their entire operations, including our omni point of sale and contract management system to support retail lending and leasing. Motorcycle Group consisting of motor lease and motor loan presents lease and loan offers simultaneously to qualified applicants so that motorcycle and powersports dealers can maximize their sales and enable consumers to pre qualify and select Vehicle through Motorcycle Group's Advisors. This agreement validates Ascend's capability across and the entire leasing and loan contract lifecycle. At the same time, by leveraging the deployment of Ascent on the cloud, Motorcycle Group will be enabled to run their retail operations seamlessly and with the pricing flexibility to scale on demand. Motolese has been a NetSol client since 2013 in California and has been a leader in their field when it comes to modern technology adoption. The selection of Ascend is further recognition of this commitment and we are proud to support their strategic business development with our suite of modern solutions. Our core business and underlying technology assets that drive it have not changed. What has changed though are the underlying industry dynamics. We are finding new ways to future proof our business and adopt to a next generation Digital Strategy and one of these is by accelerating our transition to the cloud. In recent months, the automotive industry has witnessed a significant push towards digital transformation in the Retail Space. Marked by various announcements of newly formed partnership, major acquisitions and e commerce pilots, stakeholders are racing to meet the consumers' evolving expectations for online shopping options, including what traditionally in person Big ticket items. In summary, we are welcoming the return to normalcy that we are starting to see around the globe and developing comprehensive strategies to target high value customers in key geographies and in new formats. After a challenging year, we have emerged stronger than before and we are entering fiscal 2022 focus on a return to growth with a plan to get there. And with that, we can open the call for questions. Operator? Thank you. We will now begin the question and answer session. You will hear at home acknowledging your request. If you're using a speakerphone, please pick up your handset before pressing any keys. Please limit your questions to 1 plus one follow-up. Thank you. We will pause for a moment as callers join the queue. Our first question is from Todd Felder with Advisory Group Equity Services. Please go ahead. Congratulations, Najeeb, to you and your team on a great quarter. It looks like NetSol has emerged nicely out of COVID and this was the strongest quarter for the company I've seen in the last couple of years. I was really happy to see the guidance going forward and it looks like you're going to have an increasing revenues, margins and profitability. But what I wanted to ask you about was a little bit of your Investor Relations going forward. I see a company that has over a $5.50 per share book value, dollars 33,000,000 in cash and $3.50 in assets for every dollar in Technologies and I just can't figure out why your stock price is trading at such a discount. So I was hoping that you could discuss some upcoming Investor Relations activities and some ways that we can get more investors informed of your company. Well, thank you, Todd, for your comments. I appreciate it. I think the combination of reasons as I spelled out and Roger did about the numbers, Obviously, last 18 months have been challenging to do any kind of aggressive investor activities going to road shows and Technologies. I think company has been focused on the fundamentals as we have demonstrated last this quarter. I I think once the fundamental continue to improve, which I have every confidence that this will continue and the guidance we've given, I believe we will attract new investor and new institution. And we'll do some more activities in coming 2 years or so to see if we can really broaden our Industrial Base and invite some people to look at the company. We'll do many other things. But right now, Todd, we are So focused on new strategies, looking at the new innovation we're doing, whether it's autos or our current business and the new innovation happening in the company. I think market will see that with our buyback strategy, which we have done quite successfully in last few months and improvement of fundamentals, I think the market will appreciate that this company is really exceptionally doing well in the fundamental and we will work very hard to unlock the potential, the real potential. Thank you. I appreciate that. And I know that you're continuing to do the stock buyback, have you and your board considered a dividend for shareholders with some of that cash? This thought has come to our mind many times quite frankly. Buyback was really designed to really to make sure that we do understand the Undervalued and that we had the ability. Now we have the cash and we have many investment opportunities and whether it's innovation or hiring more people or driving some maybe M and A at some point. So I think we will weigh in very carefully, what is the best way to invest and give it back to the shareholder. And and that option has never been ruled out, but I think we have to be very careful how we deploy cash. If we can invest to create Twice more opportunities in the accretive revenue or maybe invest in the innovation that is moving so fast. I think we'll do quite well and then eventually The investor will see the value in the price by performance by fundamental improvement. Again, I appreciate you taking My question is and congrats to you and your team on a great quarter again and I look forward to witnessing the success in the future. Thank you. Thank you again, Todd. At this time, this concludes our question and answer session. If your question was not addressed during the Q and A session, Please contact NetSol's Investor Relations team by emailing them at investorsnetsoletech.com or by calling them at 949-574-3860. I would now like to turn the conference back over to Mr. For his closing remarks. Thank you for joining us today, but I do want to make a correction. The dealers we signed in California is about 7 North I think I misread the number. So it is 7 dealership gone live in California for the mini solution. I especially want to thank all of you investors for their continued support, our loyal customers and our most dedicated employees worldwide for their ongoing contribution. We look forward to updating you on our next call in the Q1. Thank you. Thank you for joining us today for NetSol's Fiscal 4th Quarter and Full Year 2021 Earnings Call. You may now disconnect. Thank you.