Q2 2024 NetSol Technologies Inc Earnings Call
Participants
Patti McGlasson; SVP of Legal & Corporate Affairs, Corporate Secretary, General Counsel; NETSOL Technologies, Inc.
Najeeb Ghauri; Founder, Chairman & CEO; NETSOL Technologies, Inc.
Roger Almond; CFO; NETSOL Technologies, Inc.
Naeem Ghauri; Founder, President & CEO Innovation and OTOZ; NETSOL Technologies, Inc.
Eric Green; Analyst; Buttress Management
Todd Felty; Analyst; Asia Financial Holdings Ltd.
Presentation
Operator
Good morning, and welcome to the NetSol Technologies Second Quarter 2024 earnings conference call. On the call today are Najeeb Ghauri, Chairman and Chief Executive Officer, Roger Almond, Chief Financial Officer, and Patti McLaren, General Counsel, and named Gorrie, President and Founder.
I would now like to turn the call over to Patti Glassman, who will provide the necessary cautions regarding the forward-looking statements made by management during this call. Please proceed.
Patti McGlasson
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.
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 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 K and quarterly reports on Form 10 Q.
I would also like to point out that we will be discussing certain non-GAAP measures in 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.netscout.com and via link available in today's press release.
Now I'd like to turn the call over to Najeeb.
Is Najeeb on mute? (multiple speakers)
Najeeb Ghauri
Thank you, Patti. Thank you, Barry, and good morning, everyone. Like we began the fiscal year, our second quarter of fiscal 2024 was characterized by increases in total revenue, improved gross margins and profitability, which demonstrates both the strength of our business model and our ability to execute on our growth strategy.
Revenue grew once again in the quarter, driven by solid performance across our business as we continue to scale our SaaS business. Our hybrid license and SaaS model has become a strong catalyst for our growth in both this quarter and throughout the fiscal 22 and 2024. We recognized substantial license fees of $3 million in this quarter as part of part of a new large contract in Asia with a major automotive company. We are thrilled to have distinguished ourselves from a highly competitive pool of candidates to win this contract, which we expect to officially announce in the coming weeks.
Our selection reflects both our visibility and recognition in the market as well as the superior performance and reliability of our products that is required by major companies operating on a global scale licensees are a key part of our business, and we expect them to continue to represent a significant portion of our revenue for the foreseeable future.
That said, license revenue can be a bit lumpy and a major focus for us is to continue to build on an already robust pipeline of potential licensing and SaaS opportunities to deliver more consistent results for the long term. We achieved growth in our recurring subscription and support revenues in the quarter at the heart of our SaaS business, our products like the autos, digital retail platform and our API first marketplace, Apex.
Now we are committed to the continuous innovation and improvement of these and additional SaaS offerings to meet the diverse demands of our customers, integrating leading technology, such as deep learning AI algorithms to ensure that we are position at the forefront for our industry during the quarter, we unveiled autos 2.0, implementing major updates to our digital retail and mobility platform to expand on existing offerings with a phased launch planned for the next year. The auto platform is the premier SaaS offering powering services such as mini USA's mini anywhere retail platform.
Since June 2021, supported by autos, mini AnyWare enrollment has doubled over the past 12 months and is now active across nearly two thirds of the mini USA dealership network in the U.S., enabling a five times increase in lead volume and vehicle sales. Also in the quarter, we expanded our relationship with one of our key automotive clients by supporting the launch of AutoNation mobility micro lease marketplace with autos, back-end technology. The automotive market is witnessing a significant shift towards shorter vehicle usage options in lieu of traditional long-term leases. And the autos 2.0 platform is ideally so to support this new micro lease marketplace that allows customers to navigate the entire leasing process from vehicle selection to deal configuration to finalizing each transaction.
Overall, we're very excited and pleased with our second quarter results. As I said before, our performance is a demonstration of both the strength of our business model and our ability to execute on our growth strategy. Moreover, we continue to strategically invest and allocate capital to further expand our presence across key high-growth markets like North America. And we are pleased to see steady progress across all three of geography markets, North America, Europe and A-Pac given our recent results and trajectory, we expect to see strong double-digit organic revenue growth and improved margins in fiscal 2024 as we move into a period of more sustainability profitability.
I'll now turn the call over to Roger Almond, our CFO, to go over our financials from this quarter. Roger?
Roger Almond
Thanks, Najeeb. Our total net revenues for the second quarter of fiscal 2024 were $15.2 million compared with $12.4 million in the prior year period. On a constant currency basis, total net revenues were $15.3 million. For the six months ended December 31st, 2023, total net revenues were $29.5 million, compared to $25.1 million in the prior year period. On a constant currency basis, total net revenues were $29.6 million.
License fee for the quarter ended fiscal 2024 were $3 million compared with $16,000 in the prior year period. License fees on a constant currency basis were $3.1 million. In the first six months of fiscal 2024, license fees were $4.3 million compared with $266,000 in the prior year period and the same on a constant currency basis.
Recurring revenues are subscription and support revenues for the second quarter of fiscal 2024 were $6.8 million compared to $6.5 million in the prior year period and the same on a constant currency basis. Recurring revenues for the first six months of fiscal 2024 were $13.3 million, compared to $12.5 million in the prior year period and the same on a constant currency basis.
Total services revenue for the second quarter of fiscal 2024 were $5.4 million, compared to $5.9 million in the prior year period and the same on a constant currency basis. Total services revenues for the first six months of fiscal 2024 were $11.9 million, compared to $12.3 million in the prior year period and the same on a constant currency basis.
Total cost of revenues for $8.1 million for the second quarter of fiscal 2024 compared to $9.2 million for the second quarter of fiscal year 2023. On a constant currency basis, total cost of revenues was $9.4 million. Gross profit for the second quarter of fiscal 2024 was $7.2 million or 47% of net revenues compared with $2.1 million or 25% of net revenues in the prior year period.
On a constant currency basis, gross profit was $5.9 million. Gross profit for the six months of fiscal 2024 was $13.3 million or 45% of net revenues compared to $7.4 million or 29% of net revenues in the prior year period. On a constant currency basis, gross profit for the six months ended December 31, 2023, was $10.6 million.
Operating expenses for the second quarter of fiscal 2024 were $6.1 million or 40% of sales compared to $6.2 million or 50% of sales in the same period last year. On a constant currency basis, operating expenses for the second quarter were $6.7 million or 44% of sales.
Operating expenses for the six months ended December 31, 2023 were $12 million or 41% of sales, compared with $12.3 million or 49% of sales in the prior year period. On a constant currency basis, operating expenses for the first six months of fiscal 2024 were $13.1 million or 44% of sales.
Turning to our profitability metrics, GAAP net income attributable to NetSol for the second quarter of fiscal 2024 totaled $408,000 or $0.04 per diluted share compared with a GAAP net loss of $2.1 million or a loss of $0.19 per diluted share in the second quarter of fiscal 2023.
Gaap net income attributable to NetSol for the first six months of fiscal 2024 totaled $439,000 or $0.04 per diluted share compared with a GAAP net loss of $2.7 million or a loss of $0.24 per diluted share in the prior year period. Included in our net income this quarter was a loss of $15,000 on foreign currency exchange transactions compared to a gain of $657,000 in the second quarter of fiscal 2023.
On a constant currency basis, we realized a loss of $23,000 on foreign currency exchange transactions. Included in our net income for the six months ended December 31, 2023 was a loss of $149,000 on foreign currency exchange transactions, compared to a gain of $2 million in the prior year period. On a constant currency basis, we realized a loss of $197,000 on foreign currency exchange transactions.
Because we operate in several geographical regions, a significant portion of our business is conducted in currencies other than the US dollar, a decrease in the value of the US dollar compared to foreign currency exchange rates generally has the effect of increasing our revenues, but it also increases our expenses denominated in currencies other than the USD. Similarly, as the US 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 US dollar.
Moving to our non-GAAP metrics. Our non-GAAP adjusted EBITDA for the second quarter of fiscal 2024 was $725,000 or $0.06 per diluted share, compared with a non-GAAP adjusted EBITDA loss of $1.3 million or $0.12 per diluted share in the second quarter of the previous fiscal year.
Non-gaap adjusted EBITDA for the first six months of fiscal 2024 was $1.2 million or $0.10 per diluted share compared with a non-GAAP adjusted EBITDA loss of $1.4 million, or $0.12 per diluted share in the second quarter of the prior fiscal year.
Please see the reconciliation schedules contained in our earnings release for our revised calculations of adjusted EBITDA for the quarters ended December 31, 2023 and 2022.
Turning to our balance sheet. At quarter end, we had cash and cash equivalents of approximately $15.7 million or approximately $1.38 per diluted common share. Total NetSol stockholders' equity at December 31, 2023 was $34.5 million, or $3.03 per share.
That concludes my prepared remarks. I'll now turn the call back over to Najeeb.
Najeeb Ghauri
Thank you, Roger. This was an excellent quarter for NetSol to be excited by our progress and are very optimistic for the journey ahead we believe we are well positioned on a path towards growth and sustainable profitability, and we look forward to driving value for our shareholders as we continue to execute on our growth strategy in the later half of 2024.
With that, I'd like now turn the call over to operator for questions.
Operator? Is she there? Roger?
Roger Almond
Yes, I'm here.
Najeeb Ghauri
Where is the operator? I'm sure John is following up with them. John, you are there?
Roger Almond
Yeah. I don't know
Najeeb Ghauri
John, you are there? Hello?
Roger Almond
Someone should bring them in line again, reconnect to the Operator?
Patti McGlasson
Yeah. (inaudible)
Najeeb Ghauri
It's never happened before. Are you calling John, Patti?
Patti McGlasson
Yes, I'm sorry. We're handling this on the chat. Hopefully we can get your attention in a moment.
Question and Answer Session
Operator
So please hold by Ladies and gentlemen, I apologize for the inconvenience. Please stand by. We will resume momentarily.
Ladies and gentlemen, once again, we thank you for your patience. (Operator Instructions) [Eric Green, Buttress Management].
Eric Green
Hey, guys, thanks for taking the question. You mentioned integrating deep learning AI algorithms into your technology. Can you elaborate a little more on those algorithms and how you're kind of leveraging that AI to enhance your product offerings?
Najeeb Ghauri
Thank you for the question. Naeem, you want to jump in?
Naeem Ghauri
Yes, sure, sure. So what we do is that we have access to a lot of data and we actually built a few like a warehouse of metadata. And then we run our algorithms based on that data that's coming from thousands of dealers and up our installations are across the globe coming from different markets. What we are able to determine our behavior and trends and patterns on, for example, what type of products are sold in one market as opposed to another credit risk credit underwriting residual values on cars, how they're moving.
So that data is really a treasure trove in terms of if you like, we run about $300 billion worth of farm assets on our portfolios across the globe. So you can imagine the amount of data that we get. And on that data, we can build large language models, which is primarily can be used for generative AI. And then that is how we actually build our algorithms based on data that can generate a two way conversation. But with any consumer going directly on our platforms as well as our dealers who are accessing systems are able to understand somebody's credit risk pretty quickly based on how that data presents itself.
So really we are at the literally the tip of the iceberg, if you like, in terms of on exploiting and manipulating the data to just add so much more value into our tech stack and going forward you'll be hearing a lot more about more specialized modules and more discrete modules that we can deploy just for AI based on the amount of data we have and how much information we have on behavior patterns, credit risk and in fact, down to even what type of cars are being sold down to what color which market. But really, it's a very exciting time for us in terms of getting into the AII., if you like, generation and iteration to now building more use cases out of the data that we have hopefully that answers your first question.
Operator
Thank you. (Operator Instructions) Todd Felty, Asia Financial.
Todd Felty
Congratulations on a great quarter there. Nice to see the improvement. Just had a few quick questions here on the deals with MINI Cooper and AutoNation. I think if I remember correctly were in 50 or 60 dealerships now, can you quantify as to how much revenue that produces on a yearly basis for you guys?
Najeeb Ghauri
Thank you for this question, Todd, are both Roger and bill, but this is almost 60 plus dealerships that we've onboarded so far.
Roger, you have specific numbers, right for the annual revenue?
Roger Almond
Yes. Currently we have as Nigel said, 60 dealers, and that brings in about $100,000 a year with the 60 builders. (multiple speakers)
Najeeb Ghauri
A month.
Roger Almond
Sorry, $100,000 a month, which is $1.2 million a year currently with 60 dealers.
Todd Felty
That's great to hear. And on the AutoNation, I know you're growing really fast there. How much revenue is AutoNation contributing now and what would you project for the current fiscal year?
Najeeb Ghauri
And then you want to jump in, namely the champion of AutoNation and identity products? Good name.
Naeem Ghauri
I can pick that up. So I thought this is a different use case too many for many. We're doing digital retail for AutoNation. We're doing a subscription and what they've done is that they've had launched the subscription products did a soft launch. But in terms of the revenue, we've generated already just over $1 million in terms of implementation and up just tailoring the platform. They use their use case going forward. We believe if they hit the target, this could be big or as big at least if not bigger than what we're doing with many subject to them hitting targets because the subscription based on certain tiers, if they hit those tiers in terms of usage, then the revenue starts to grow. So we are so exciting. It's a model because it's a win-win. If they grow when they grow, we grow with them and it could there's no upper limit or ceiling to where the revenue could grow if they do go the product with the right marketing and planning.
Todd Felty
Okay. That's great to hear. And I assume that since it's set up via the margins on that automation business now that everything is set up are extremely high for you?
Najeeb Ghauri
I'm sorry, what's the question again?
Todd Felty
Yes. So the margins should be very high on that or AutoNation as high as it continues to grow?
Naeem Ghauri
Well, what happens is that, you know, there is a setup costs which the client pays for and that's a product is deployed on the cloud and it's very, very scalable. So it's a slight we could grow the autos revenue by five fold five times and without having a major impact on cost but really is the adoption, the faster or bigger the adoption, the better the margins because we do have a fixed amount of costs to run the platform. And we are already in profit in terms of what we bring from Mini and AutoNation.
So we already in the black, however, as the scale and grow and we get additional customers. So we have a pipeline of new customers we are bidding for. And as that happens, you know, with scale, the profit margins to grow and quite rapidly, and that's great to hear.
Todd Felty
And I know your license agreement can be lumpy and I know that currency exchanges or the currency gains and losses can affect your net income. But have you all reached a point yet where you're able to project positive operating income every quarter going forward? Are you comfortable thinking that will happen?
Naeem Ghauri
(multiple speakers) Our model is that we are levered up to the room and I'll mistake that might've thought is that ultimately the future for us is fast. And but we are operating on a hybrid model where license is still very attractive. And although it's lumpy good news is that from where we were three, four years ago, we depending completely on license now we are offsetting it does have a portion of our revenue with an ARR annual recurring revenue as opposed to lumpy license revenue.
So even if we don't get a big license revenue should like a win, we continue to grow our SaaS revenue at a decent pace so that at some point we'll have a tipping point where we will get to a position where even without any losses income we are profitable as a company.
Najeeb Ghauri
Also if I can add one, let me add one more point to add to name or the beauty of our model is that like Mentor is a hybrid model that we do have a pretty good demand for our flagship Ascent in all three markets.
Yes, it's a much longer sales cycle than go through a lot of, I think a duration, but combination is amazing with the license revenue and of course, the size, which is a growing trajectory for us. So all in all, I believe we are in a good position. If you look at the competitor and it really you see a company which has such an amazing history for license sale and all his 25 years now, we're managing both sides quite well effectively. And we believe eventually, as I said in my prepared remarks, and that the growth is quite positive for coming quarters and hopefully will continue in the following year.
So I think overall, the higher revenue, whether it's license, of course, says it just affects all the way to the gross margin. And net income in companies are a good job to be more efficient and have been more leaner that will impact all our metrics in the coming quarters.
Todd Felty
That's great. And that tipping point that names I spoke about were you won't even need licensing agreements to achieve an operating on the project, would you expect that to happen this year or next year or is there any and the sort
Najeeb Ghauri
Yeah. I believe there's been, I believe next year is more probably because you're still building the sales trajectory here. So I think next year is a better way to look at it. But to your question specifically on the margins?
Naeem Ghauri
Yeah. Look, I think in terms of when that tipping point is up high, I don't think we could predict that, but I think it's imminent. If you see a growth. And if you see how subscription revenue has grown from a single digit millions to where we are in a relatively short time, I think we're reaching that point very soon at don't. I can't put a if you like of a flag on exactly which quarter, which month, but I think we're not far off.
Todd Felty
Okay, that's great to hear. And then my final question is, I know in the past you've had several share buybacks go on that you look at the stock now, I think we're right around $3 a share in book value and we're doing over $5 a share in sales. Do you have any share buybacks going on now? Or do you plan to announce any in the near future?
Najeeb Ghauri
Well, at this stage, we don't have any plan immediately in the short run simply because as I mentioned, we are investing in key markets, whether it's North America and some other region. And there's lots of activities in the new business opportunities and new markets also, which we'll share with the market in the appropriate time. So obviously, we have done buybacks a few times in the past. And you're right, it is the attractive price to do that. But we are open about it, but we have not made that decision at this point.
Operator
Thank you. We have reached the end of our question and answer session. So I'd like to pass the floor back to management for any additional closing remarks.
Najeeb Ghauri
Thank you for joining us today, and I do apologize for the little glitch in the beginning of the Q&A. I especially want to thank all of our investors, our for their continued support, our loyal customers and our most dedicated employees worldwide for their ongoing contributions, and we look forward to updating you on our next call. Thank you.
Operator
Ladies and gentlemen, this does conclude today's teleconference. Once again, we thank you for your participation and you may disconnect your lines at this time.
