NTWK - NASDAQ

Good morning. Welcome to NetSol Technologies Fourth Quarter and Year-End 2023 Earnings Conference Call On the call today are Najeeb Ghauri, Chairman and Chief Executive Officer; Roger Almond, Chief Financial Officer; Naeem Ghauri, Chairman and President; and Patti McGlasson, General Counsel. I would now like to turn the call over to Patti McGlasson, who will provide the necessary cautions regarding the forward-looking statements made by management during this call. Patti, please proceed.

Good morning, 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 including any accompanying slides may include forward-looking statements reflecting management's current forecast of certain aspects of the company's future, and our actual results could may 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-K 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. Finally, I would like to remind everyone that this call will be recorded and made available for replay at www.netsoltech.com and via link available in today's press release. Now I'd like to turn the call over to Najeeb. Najeeb?

Thank you, Patti, and good morning, everyone. From a financial perspective, the fourth quarter came in below our expectations. That said, I'm proud of the progress we made in the year and specifically the fourth quarter on the three core drivers of our growth plan. Number one, transition to SaaS or Software as a Service model and developing products that enhance the strategy. Two, our cost reduction across our company. And the third, expansion into the North American market in the U.S. specially. Now let's drill down on each of these. Beginning nearly two years ago, NetSol embarked on a journey to transition our license income to recurring subscription or SaaS-based revenue for all enterprise resource planning and other solutions within the automotive asset and mobility markets. We are seeing positive sequential on over year-over-year growth in our subscription and support revenues. I'm especially pleased to report that our full year subscription and support revenues exceeded our stated targets of $25 million. Currently a large portion of our revenue is recurring. Now mobility solutions are now 100% SaaS or cloud-based. We continue to seek interest from existing clients in converting SaaS pricing and with new clients buying SaaS and cloud-based solutions. Mainly our flagship NFS Ascent product, our recurring subscription and support revenues are positioned for continued growth. Ascent is our flagship SaaS-based enterprise solution designed for end-to-end management of the entire contract lifecycle. Our customers deploy the solution to efficiently manage what are often numerous, complex, and differing leasing contracts. Augmenting our Ascent solution is our AppexNow marketplace of API-first applications that provide essential customizability. Applications like Flex are API-based calculation engine and Hubex which allows for efficient and streamlined integration of API applications with a developer-friendly plug-and-play system. In the fourth quarter, we implemented Flex with a major business finance provider in the United Kingdom to offer an online quotation tool providing fast and accurate payments and rates for their customers. We anticipate the adoption of these applications by both new and existing customers as we continue to expand an AppexNow marketplace and increase the customizability of our products to meet the specific needs of virtually any customer. Our Auto solution continues to see traction in the U.S. as well, specifically with its adoption in MINI Anywhere dealerships, a subsidiary of BMW Group throughout the region. To date, Auto's is live in 60 MINI Anywhere dealerships across 36 U.S. states. We're also strengthening our partnership with Amazon Web Services or AWS through numerous recognitions and accreditations that establish NetSol as a premier partner committed to designing, building and maintaining secure, reliable and efficient cloud architectures, which relate specifically to our SaaS offerings. As anticipated, our transition to a SaaS-based model has had a short-term impact on our cash flows, but the nature of SaaS pricing is such that we will be recognizing more consistent, predictable, higher margin revenues as the revenue mix evolves. Over time, we expect our cash flows to return to an eventually exceed historic levels as we continue to drive this transition. And we believe that over the next 18 months, a consistently growing percentage of our revenue should be recurring. Another impact of the SaaS-based model is that it requires significantly less manpower to provide the level of support for our technology that our traditional licensing model has historically demanded. As a result, in the second quarter of 2023, we began implementing company-wide cost reduction initiatives that includes the reduction of our overall headcount by what we expect to be approximately 300 after a period of severance required, the local laws that extend into the first and second quarter of the fiscal 2024. We expect further cost reduction allowing us to better allocate capital to growing, higher margin parts of our business, and drive to profitability. Lastly, we remain intently focused on expanding into the North American markets. We have established a facility in Austin, Texas, a burgeoning technology hub in addition to our corporate headquarters in Encino, California. And we are taking the time to staff the office the most qualified individuals to help us efficiently grow our business in the United States. Our established markets remain strong. NetSol is a leading provider of global leasing software solution in the Asia Pacific region, and we have a presence throughout Europe with room for additional growth. The established presences across key geographic regions provide us with a strong industry reputation, a proven portfolio of contracts with Tier 1 businesses and our pipeline that continues to be robust with several potential licensing deals in the works. Despite this progress, I want to be clear that we are not satisfied with our results, but we are confident that the pieces are in place to generate long-term growth and positive outcomes for our business. Based on our healthy pipeline of opportunities, we are targeting $61 million to $63 million in revenue for fiscal 2024. This would be an approximate 16% to 20% growth - revenue growth in this fiscal year. With that, I'll now turn the call over to Roger Almond, our CFO, to go our fourth quarter and full year financial results. Roger?

Thanks, Najeeb. Our total net revenues for the fourth quarter of fiscal 2023 were $13.8 million compared with $13.5 million in the prior year period. On a constant currency basis, net revenues were $14 million. For the full year 2023, total net revenues were $52.4 million compared to $57.3 million in the full year 2022. On a constant currency basis, total net revenues were $54.7 million. License fees were approximately $21,000 compared with $952,000 in the prior year period and the same on a constant currency basis. For the full year 2023, license fees were $2.3 million compared with $4.5 million in the full year 2022. On a constant currency basis, license fees were $2.4 million. The decrease in license fees is primarily related to a decrease in licensing contracts compared with the prior year period. Recurring revenue or subscription and support revenues for the fourth quarter were $6.8 million compared with $6.1 million in the prior year period. On a constant currency basis, recurring revenues were $6.9 million. For the full year 2023, recurring revenues were $26 million compared to $28.3 million in the full year 2022. Full year 2023 recurring revenue on a constant currency basis was $26.7 million. The decrease in the full year recurring revenue is related to a onetime catch-up in support revenue of approximately $3.5 million in fiscal year 2022. As Najeeb mentioned, we anticipate these fees to gradually increase as we implement both our NFS legacy products and NFS Ascent. Total services revenue for the fourth quarter were $7 million compared with $6.5 million in the prior year period. On a constant currency basis, total services revenue were $7.1 million. For the full year 2023, total services revenues were $24.1 million compared with $24.4 million in the prior year period. On a constant currency basis, full year 2023 total services revenues were $25.6 million. The increase in services revenues on a constant currency basis is primarily due to the increase in change request, enhancements and reimbursable costs. Total cost of revenue was $9 million for the fourth quarter compared to $8.7 million in the quarter of fiscal year 2022. On a constant currency basis, total cost of revenues was $11.6 million. For the full year 2023, total cost of revenues was $35.5 million compared to $33.5 million in the full year 2022. On a constant currency basis, total cost of revenues was $45.5 million. Gross profit for the fourth quarter of fiscal 2023 was $4.8 million or 35% of net revenues consistent with $4.8 million or 35.6% of net revenues in the prior year period. On a constant currency basis, gross profit was $2.4 million. For the full year 2023, gross profit was $16.9 million or 32.3% of net revenues compared to $23.7 million or 41.5% of net revenue for the full year 2022. On a constant currency basis, gross profit was $9.2 million. The decrease in full year gross profit is primarily related to a combination of decreased net revenues and increases in cost of revenues. Operating expenses for the fourth quarter were $7.7 million or 56% of sales compared to $6.4 million or 47% of sales in the same period last year. On a constant currency basis, operating expense for the fourth quarter were $9 million or 64% of sales. Full year 2023 operating expenses were $25.7 million or 49% of sales compared to $24.8 million or 43.3% of sales in full year 2022. On a constant currency basis, operating expenses were $30.4 million or 55.7% of sales. Turning to our profitability metrics. Our GAAP net loss attributable to NetSol for the fourth quarter fiscal 2023 totaled $5 million or a loss of $0.45 per diluted share compared with a GAAP net loss of $2.2 million or a loss of $0.19 per diluted share in the fourth quarter of last year. On a constant currency basis, our net loss attributable to NetSol totaled $7.8 million or $0.69 per diluted share. GAAP loss attributable to NetSol for the full year ended June 30, 2023, was $5.2 million or a loss of $0.46 per diluted share compared to a loss of $851,000 or $0.08 per diluted share in the prior year period. On a constant currency basis, net loss attributable to NetSol was $12.2 million or $1.09 per diluted share. As always, it's important to point out that included in our net loss this quarter included a loss of $610,000 on foreign currency exchange transactions compared to a gain of approximately $1.6 million in the fourth quarter of last year. On a constant currency basis, we realized a loss of $1.2 million on foreign currency exchange transactions. For the full year 2023, our net loss included a $6.7 million gain on foreign currency exchange transactions compared to a $4.3 million gain in the full year 2022. On a constant currency basis, we realized a gain of $9.4 million. Because we operate in several geographical regions, a significant portion of our business is conducted in currencies other than the U.S. dollar. A decrease in the value of the U.S. dollar compared to foreign currency exchange rates generally has effective increase in our revenues, but 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 rates, it tends to reduce our revenues, but it also reduces our expenses denominated in currencies other than the U.S. dollar. Moving to our non-GAAP metrics. Non-GAAP adjusted EBITDA for the fourth quarter of fiscal 2023 was a loss of $4.2 million or $0.37 per diluted share compared with non-GAAP adjusted EBITDA loss of $1.4 million or $0.12 per diluted share in the fourth quarter of last year. Non-GAAP adjusted EBITDA for the full year ended June 30, 2023, was a loss of $2.3 million compared to an adjusted EBITDA of $1.8 million for the full year ended June 30, 2022. Please see the reconciliation schedules contained in our earnings release for our revised calculations of adjusted EBITDA for the quarters and years ended June 30, 2023 and 2022. Turning to our balance sheet. At quarter end, we had cash and cash equivalents of approximately $15.5 million or approximately $1.38 per diluted common share Total net sold stockholders' equity at June 30, 2023, was $36.8 million or $3.24 per share. That concludes my prepared remarks. I'll now turn the call back over to Najeeb. Najeeb?

Thank you, Roger. As I said before, we are not satisfied with our current results, and we believe that we have a plan and the pieces and place to change that for a long term, our transition to SaaS-based revenues continues to be underway. And as more and more customers either transition to SaaS-based pricing or enter into the new SaaS-based pricing contracts, we will begin to see the impact of consistent recurring revenues on our financial results. Moreover, our comprehensive and highly customizable product portfolio allows us to meet the needs of virtually any customer. With established market presences in Asia and Europe, and with exciting new opportunities in North America, we believe that we are positioned for long-term sustainable growth and positive results. With the pieces coming into place, we are now focusing our time energy and patience on the execution of this strategy. With that, I would now like to open the call for questions. Operator?

Thank you. [Operator Instructions] Our first question is from the line of [Karan Lewis] with [DLA Piper Capital]. Please proceed with your question.

Hi, guys. Thanks for taking the question. You spoke about the AppexNow marketplace and specifically the Flex and Hubex applications. I was wondering if you could elaborate on the marketplace and how these applications tie into your other product offerings, such as NFS Ascent?

One moment please we're experiencing difficulties, we will resume momentarily. Please proceed with your question.

Hi, guys. So just wondering about the AppexNow marketplace. You specifically mentioned the Flex and Hubex applications. Could you elaborate on that marketplace and how these applications tied to your other product offerings, such as NFS Ascent?

Let me jump in. I'll answer that. Are your questions whether our Appex marketplace - AppexNow marketplace can also interface into other products other than Ascent?

Yes, partially just some general color on the marketplace around those applications as well.

Yes. So okay. So the marketplace is able to take other products which are not NetSol products because it's become part of an ecosystem. And because it's all API first, they're all compatible. I think, in fact, if there's a client who wants to buy a product from the marketplace which is not ours, we can actually make that happen, but we take a piece of the revenue from whoever owns the products. So it becomes a little bit like an app store.

Got it. Got it. Thank you. That's all from me.

Thank you. [Operator Instructions] At this time, I will now turn the call back to Roger Almond for closing remarks.

Thank you for joining us today. I especially want to thank our investors for their continued support, our loyal customers and our dedicated employees for their ongoing contributions. We look forward to updating you on our next call. Thank you.