NTWK - NASDAQ

Good morning. Welcome to NetSol Technologies Third Quarter 2024 Earnings Conference Call. On the call today are Najeeb Ghauri, Chairman and Chief Executive Officer; Roger Almond, Chief Financial Officer; Patti McGlasson, General Counsel; and Naeem Ghauri, President and Founder. 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 the call. Please proceed.

Good morning, everyone, and thank you for joining us. Following the 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 our actual results 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 our 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. The third quarter of 2024 was another very strong quarter for our business, highlighted by revenue growth and our third consecutive quarter of profitability. In this quarter, we demonstrated NetSol's ability to deliver profitable results without the recognition of material license fees. We reported strong services revenues and consistent subscription and support revenues, which contributed to us achieving earnings per share of $0.03 for the quarter. Our ability to achieve profitability without significant license fees, showcases the enhanced strength and reliability of our model as we continue to win new customers on a global scale. And these past several quarters, in particular, are an excellent example of our hybrid license and SaaS model at work. In the first and second quarters of the fiscal '24, we recognized substantial license fees, which translated to consecutively profitable quarters to start the year as we continue to build our customer base. These new contracts are now generating services revenues for our business with services revenues in the third quarter of fiscal 2024, increasing approximately 60% compared to the third quarter of fiscal 2023. This is an encouraging development as we have traditionally needed to recognize license fees in a given quarter to achieve profitability. We have a healthy sales pipeline of both license and SaaS deals in our established markets and we are intently focused on building similar pipelines in our more nascent markets, specifically the United States. We're also very excited by the progress we are making advancing our initiatives in the U.S. market. We are noticing strong interest from the U.S.-based customers, specifically in the Professional Services segment of our AWS cloud services, data analytics and AI-based products. We anticipate to leverage the finance service challenge in North America and create additional revenue stream. We believe that there is tremendous potential for growth in this market, and we are strategically allocating capital to make sure we are ideally positioned to capture our SaaS offerings, in particular, and gaining some strong early traction in this region. With our auto digital, retail and mobility platform currently live in 58 MINI USA dealerships across the U.S. and with AutoNation powering the back end of their recently launched micro lease marketplace, our successful journey with MINI Anywhere and AutoNation Mobility has opened new opportunities in the retail and mobility sector in the U.S. The U.S. market is home to thousands of major auto franchise dealerships across the country looking to adopt omnichannel digital retail solutions and modernize their vehicle sales and purchase processes. This interest has resulted in strong pipeline activity with OEMs and dealer groups of various sizes demonstrating interest in our autos products. With our visibility today, we believe that we will be able to achieve at least $28 million in subscription and support revenues for the full fiscal year 2024. We are intently focused on the continuous innovation and improvement of our products and offerings to meet the diverse demands of our customers. To that end, we have begun leveraging deep learning AI algorithms into our business processes and have launched a company-wide AI initiative to both reduce internal costs and enhance external quality improvements. As a long-standing global business services and asset finance solution providers, we have nearly 27 years of internal program management data, which we intend to use to train our AI use cases and further enhance efficiencies for both us and our customers. We're also in the process of creating industry-leading AI use cases for our clients to help improve their business metrics with an anticipated launch of several new AI-based offerings in the calendar year, which is something that we are very excited about, and we'll keep you apprised as we continue to progress this initiative. Overall, we are very pleased with our results, in both the third quarter and fiscal year-to-date. We are beginning to realize the strength of our business model, exemplify by consistent revenue improvement and three straight quarters of profitability. Given our results, we remain confident in our expectations of double-digit organic revenue growth and improved margins, and we are on pace to reach our target revenue range of between $60 million to $61 million for the full fiscal year of 2024. I now turn the call over to Roger Almond, our CFO, to go over our financials from this quarter. Roger?

Thanks, Najeeb. Before I go over our financial results, I would like to provide some additional information on the selection of our new auditor, Fortune CPA. On May 6, 2024, BF Borgers was dismissed as the independent public accounting firm of NetSol Technologies. As a result of BF Borgers well-publicized suspension from appearing and practicing before the SEC, which affected hundreds of public companies. The Audit Committee and the Board of Directors mobilized quickly, approving this dismissal and appointment of Fortune CPA to serve as the company's independent registered public accounting firm for both the quarter ended March 31, 2024, and the year ended June 30, 2024. We believe that Fortune CPA is well suited to assist us in our auditing responsibilities, and we look forward to working with them going forward. With that, I will now go over our financial results. Our total net revenues for the third quarter of fiscal 2024 were $15.5 million compared with $13.5 million in the prior year period. On a constant currency basis, total net revenues were $15.6 million. License fees for the third quarter of fiscal 2024 were $558,000 compared with $2 million in the prior year period. License fees on a constant currency basis were $577,000. Recurring revenues or subscription and support revenues for the third quarter of fiscal 2024 were $7.1 million compared to $6.7 million in the prior year period. Subscription and support revenues on a constant currency basis were $7.2 million. Total services revenue for the third quarter of fiscal 2024 were $7.8 million compared with $4.9 million in the prior year period. Total services revenue for the third quarter 2024 on a constant currency basis were $7.8 million. Total cost of revenues was $8 million for the third quarter of fiscal 2024 compared to $8.8 million in the third quarter of fiscal year 2023. Gross profit for the third quarter fiscal 2024 was $7.5 million or 48% of net revenues compared with $4.7 million or 35% of net revenues in the prior year period. Gross profit was $7.2 million or 46% of net revenues on a constant currency basis. Operating expenses for the third quarter fiscal 2024 were $6.2 million or 40% of sales compared to $5.6 million or 42% of sales in the same period last year. On a constant currency basis, operating expenses for the third quarter were $6.3 million or 41% of sales. Turning to our profitability metrics. GAAP net income attributable to NetSol for the third quarter fiscal 2024 totaled $328,000 or $0.03 per diluted share compared with a GAAP net income of $2.5 million or $0.23 per diluted share in the third quarter of fiscal 2023. Included in our net income in the quarter was a loss of $964,000 on foreign currency exchange transactions compared to a gain of $5.4 million in the third quarter of 2023. 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 effect of increasing 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 rate, 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 third quarter of fiscal 2024 was $810,000 or $0.07 per diluted share compared with non-GAAP adjusted EBITDA of $3.3 million or $0.29 per diluted share in the third quarter of the previous fiscal year. Please see the reconciliation schedules contained in our earnings release for our revised calculations of adjusted EBITDA for the quarters ended March 31, 2024, and 2023. Turning to our balance sheet. At quarter end, we had cash and cash equivalents of approximately $12.3 million or approximately $1.08 per diluted common share. Total stockholders' equity -- total net sold stockholders' equity at March 31, 2024, was $35.3 million or $3.10 per share. That concludes my prepared remarks. I'll now turn the call back over to Najeeb.

Thank you, Roger. We are very pleased to have delivered another strong quarter for our business and remain committed to driving continued growth of value for our shareholders in the fourth quarter as we close out the fiscal year. With that, I'd like to turn this call over to the operator for any questions or Q&A. Operator?

[Operator Instructions] Your first question is from Todd Felte with AGES Financial Services. Please go ahead.

Congratulations on a solid quarter and it's really nice to see the growth in the recurring revenues and improvement margins. So just kind of breaking it down every year since 2015, our annual revenue has been kind of stuck in the range of $51 million on the low side and $61 million on the high side. And we've been hearing about our healthy pipeline and sales for many quarters with tremendous potential for growth. So do you think that fiscal year 2025 is a year that we can break out of this revenue range that we've been in the last 10 years?

First of all, thank you so much for your comment, Todd. I appreciate your comments. Absolutely, I'll have Naeem also jump in, in a minute. Look, we are very confident, we have turned the corner this fiscal year is proof three quarters continuously. Yes, we've gone through very difficult time COVID, post-COVID and many other challenges. But our business is really picking up in a sense that customers keep calling us the current customers, whether they're in APAC or China or North America or even Europe to continue to do business with us with the new markets and new locations. So there's a lot of excitement in the company Todd because there's new things opening up for our company. And this is why we feel that next fiscal year will be -- could be our strongest fiscal year, absolutely. And there's a very positive respond from some new prospects and pipeline is healthy. U.S. market is strong for us, and we're making good progress in the U.S. on some new developments, and they will be shared with you when they become material. Let me have Naeem jump in here to give his color. Naeem, go ahead.

Todd, I think we -- you are right about just the last four to five years, in terms of not getting above this -- the ceiling we have about the $60 million. And I think there's two or three very specific reasons for this. One was our product transition from our previous generation to Ascent that disrupted some sales. And by the time we hit inflection on Ascent, we were hit by COVID. And then during COVID, we also then made a decision to start changing our financial model in terms of replacing SaaS -- sorry, replacing license income with SaaS. So these three periods had an impact. I really strongly believe now that we are of those times of transition, and we are going to hit a tipping point where we will break out of the $60 million, if you like.

I will add one more thing for Todd and for the -- all of the listeners. We've been focusing on organic growth and the new thing that Naeem just mentioned in the innovation and so forth. So we have not done any M&A for many, many years by choice, we believe. Gradually, surely building organic business with amazing customer global references, and NetSol is most well-liked company in terms of our delivery record, even our competitors complement Naeem frequently in the different locations. So I think based on our record trajectory, I think we are on the right track of natural growth. And right now, we're focusing on doing things organically. And when the time comes, when we are ready, in terms of balance sheet, then we look into M&A opportunity. But for right now, organically, we're growing and we're pretty confident next fiscal year being a record year for us.

That's great to hear. And just to clarify, I said the revenue range was, I think, $51 million to $68 million. And I think that's -- I think $67.8 million was our high on revenue in the last 10 years. And I look forward to us getting in the 70s, 80s and hopefully above 100 in the next few years. So just a follow-up question. Now that we're seemingly showing and forecasting consistent profitability moving forward, at least that's what I'm interpreting, why do you think our stock trades significantly below our book value, which is now over $3 a share while other companies that also kind of use and develop AI, and I know we're moving into that area. These other companies, especially the profitable ones are trading at multiples higher.

Well, I can say what I feel and so can Naeem and then I'll ask you what do you think is the reason coming from an outsider who can see market differently than we do. But look, Yes, it is -- we don't like it. This has been a company listed for many, many years on NASDAQ. And we remain focused. We don't go out extra mile other than higher program we have with IMF, they're doing a good job. But we don't go out of extra mile to do conferences and because we've been really focused on managing our business effectively and cost also efficiently. So there will be activities in the coming months that we can really start talking the stock in the conferences and John and Walter are putting a program together for the company for the next few months. Then -- now we feel comfortable -- confident that we can go and tell the story again. So hopefully, that will have a positive impact.

Okay. That's great to hear. That kind of emulates my thoughts, and I think that will change, and I think the market will fairly value us once we can hit -- if we can hit a $20 million quarter, I don't think we've done that in quite some time and show the potential for rapid growth. A lot of these other AI companies are having, and that's why they trade at these multiples because they expect the revenue growth. So hopefully, we're trending in that direction, and we can see the hockey stick growth.

Absolutely, absolutely.

I'll fall back in the queue. Thank you.

Thank you. [Operator Instructions] We will move next with Christopher [Vasselli] with [indiscernible] Partners. Please go ahead.

Hi guys, thanks for taking the question. Provide a bit of color on this on the call, but can you provide any additional context or detail as to how AI is specifically interacting with and enhancing your products?

Yes. Naeem is a champion of AI and the whole company, and there's a lot going on, and he'll give you some color where we are. Naeem, go ahead, please.

Chris, we would like to handle AI very holistically. I think there's a lot of hype that's been created by a lot of companies. I think we looked at it totally differently, and we've been working on it quietly for some time now. So our approach is to, first of all, have a center of excellence and an AI lab internally, because internally, we could benefit from building apps and products, which will create efficiencies in our own internal delivery process. So from project management to software testing, automation, automated testing, software engineering, human resources, project planning, resource management, there's so many different horizontal areas that we can touch with AI within the company. So there's first the benefit of leveraging AI for our own business. Secondly, within the AI lab, we will provide a service to all of our clients to build their own POCs and use cases using our expertise and thought leadership. So our practice will leverage the relationships we built over the last 30-plus years. So it sort of outsized investing into their own AI initiatives organically, we are able to provide best service to them. So we will be reaching out to our clients in the course of the next quarter or two with our offering. And last, not the least, within our lab, we're also building use cases products that will have a direct impact on our clients' businesses and improving their business efficiencies and so on. So these are complementary products that stand next to Ascent and autos. These could be within our API-first approach, where we give a plug and play them into the infrastructure. And we also want to be known as an AI-first company, where Ascent and autos have in-built AI modules that allow the customers to do so much more with less people as opposed to they're doing now. So I think we are doing a very comprehensive program, trying to build AI into our product set, also into our business and how we deliver. So I think you start to see those impacts and how our operating cost is affected by being more efficient, how we can be faster in delivery, higher quality. And then at some point, you'll start to see an impact of us selling products to our clients in addition to our traditional products.

Got it. Okay, that's good to know. Thank you. That's all for me.

Thank you.

Thank you for joining us today. I'm especially more excited to see our global team executing in every front as it reflects in our quarterly performance in the future direction. I want to thank our investors for their continued support, our very loyal customers and, of course, our dedicated employees worldwide for their ongoing contributions. I look forward to updating you in our next call. Thank you, and have a good day.