NetSol Technologies, Inc. (NTWK) Earnings Call Transcript

Good morning and welcome to NetSol Technologies Fourth Quarter and Full Fiscal Year ended June 30, 2026 Earnings Conference Call. On the call today are Founder and Chief Executive Officer of NetSol Technologies Inc., Najeeb Ghauri, Global Head of Sales and Group Managing Director of Europe, Asad Ghauri; Chief Financial Officer, Sardar Abubakr; and Senior Vice President and Corporate of Legal Affairs, General Counsel and Corporate Secretary, Patti McGlasson. Also available for the Q&A portion, our Chief Accounting Officer, Roger Almond, and Chief Marketing Officer, Erik Wagner. I will now turn the call over to Patti, who will provide the necessary disclaimer regarding the forward-looking statements made during today's call. Patti, please go ahead.

Thank you. Good morning, everyone, and thank you for joining us today. After we review the company's business highlights and financial results for the fourth quarter and full fiscal year ended June 30, 2026. We will open the call for questions. . Before we begin, I'd like to remind you that our remarks today will include forward-looking statements within the meaning of the federal securities laws, including the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements include our fiscal 2027 guidance reflect management's current expectations and are subject to risks and uncertainties, and actual results may differ materially from those expressed or implied. We encourage you to review the cautionary statements and risk factors contained in NetSol's press release issued earlier today as well as our filings with the Securities and Exchange Commission, including our most recent Form 10-K and quarterly reports on Form 10-Q. I'd also like to note that today's discussion will include certain non-GAAP financial measures. A reconciliation of these measures to their most direct comparable GAAP figures can be found in the press release issued earlier today. A supplemental investor presentation is available through the webcast link and in the Investor Relations section of our website at irnetsoltech.com and has been furnished as an exhibit to the Form 8-K we will file with our press release issued this morning. Lastly, please remember that this call is being recorded and will be available for replay on our website at ir.netsoltech.com and through a link included in today's press release. [Operator Instructions] I will now hand the call over to our Founder and CEO, Najeeb Ghauri. Go ahead, Najeeb.

Thank you, Patti. Good morning, everyone, and thank you for joining our call today to review our results for the fourth quarter and full fiscal year ended June 30, 2026. Fiscal '26 was the strongest financial year in NetSol's history. Total net revenues were $74.4 million, up 12.5% year-over-year basis and over -- and our $73 million guidance. Non-GAAP EBITDA grew almost 23% and income from operations had nearly doubled. The growth reached the bottom line this year. These results reflect the company in the middle of a deliberate transformation from a services and license business and our platform business, recurring subscription and support revenue now represents approximately half of our total revenue. Later in the call, Sardar Abu, our CFO, will walk you through remaining performance obligations and the measures we will report each quarter so you can track the durability of this base. In June, NetSol returned to the Russell Indexes added to 6 benchmarks, including the Russell 3000 and the Russell Microcap Index. Index membership matters for a company our size. It makes NetSol eligible with the many institutional mandates that are limited to index constituents, and it puts us back in the universes where institutional investors screen. Let me talk about the business behind these numbers. Fiscal 2026 gave us the proof points across every part of our strategy. Earlier this month, we announced that has signed a contract to upgrade from our legacy platform to Transcend Finance. BMO is one of the largest banks in North America, and this agreement is clearest validation yet of our upgrade strategy. We have customers across North America, we have run our acquired legacy soft for decades. Each of them now has a modern path forward, and BMO shows what that path looks like. Long tenured customer chosen to deepen the relationship with NetSol on our newest technology. Across the rest of the business, the platform continued to deliver. In December, we signed one of the largest Transcend Finance contract extension in our history with a Tier 1 global auto captive customer. Transcend retail became a growth engine in the U.S. and Asad Ghauri will take you through the momentum in detail. Our Asia Pacific business continued to perform, anchored by market leadership in China and expanding alongside our customers across the region. Fiscal 2026 was also the year we build the team for the next phase. Sardar Abubakr has joined us as a Chief Financial Officer in January. At our annual meeting in June, shareholders elected a strengthened Board reelecting Ian Smith, the former CEO of BMW Group, Financial Group for the U.S.A. and Americas, and adding Richard Howard, the former President and CEO of Daimler Truck Financial Services for North America; and Aamir Ibrahim, the CEO of Jazz World, one of the world's biggest digital operators, who earlier in his career, held senior leadership roles at the Ford Motor Company and Jaguar Land Rover. The people who ran our customers' business now help govern ours. I can think of no stronger endorsement of where the company is headed. We're also transforming how we operate. Across Transcend Finance, we are reducing the resource intensity of our development and delivery model through AI-enabled development, automation and structural efficiencies. I want to be clear about how we think about this. It is not about reducing headcount, but its own say, it is about building a more scalable organization, one that is more nimble and faster to respond to changing market requirements, where our engineering and delivery capacity and grow client impact without growing costs at the same time. As part of that, we are focusing our investment on the core transplant platform and the adjacencies where NetSol has a defensible customer and domain advantage. Looking to fiscal 2027, our priorities are very clear. First, scale, transcend retail across the U.S. dealer market; second, embed AI across our products and our operations; third, upgrade our legacy installed base to transcend the BMO in the template as a template. And fourth, grow with our customers as they expand into new markets. You saw that model this year when a leading Chinese leasing company went live on Transcend Finance in Indonesia. When our customers enter a new country, they take desal with them. We're also introducing full year guidance with our fourth quarter results, Sardar Abu will take you through the numbers. I will close with this. We believe the value of what we have built the customer base, the recurring revenue, the platform is not yet reflected in our market valuation. And we see that as an opportunity. Last December, we rang the bell in Times Square, New York to mark our 26th year on NASDAQ. There is no better way to honor that milestone than the strongest year in our history, and we intend to build on it. With that, I'll hand the call over to Asad Ghauri, our Global Head of Sales and Group Managing Director of Europe to walk through the commercial and sales update. Asad?

Thank you, Najeeb, and good morning, everyone. My focus today is on what's converting to revenue for us and the pipeline behind it. But before I start, one point of context for everyone on this call is our key messaging. Our core growth is in today and going over this Transcend Finance worldwide, and Transcend retail is our big bet in our home market in the U.S., and total focus is on the execution of that. I'll start with the go-lives this year. We've had multiple A leading Chinese leasing company launched its Indonesian operations on Transcend finance. Northridge Finance Division of the Bank of Ireland when dive on Transcend to support its growth strategy in the U.K. a Tier 1 U.S.-based auto captive went live on Transcend Finance in China, a deal valued at multiple millions leasing Thailand with the latest wholesale finance system on our Transcend platform, expanding its use of analogy. These go live convert into recurring subscription support revenue going forward exactly the visibility. So that will be quantified in the call. We also renewed a multimillion dollar contract with a Tier 1 multinational bank in the United Kingdom, extending that relationship for more than a decade by another 10 years and deepening our president in the U.K. asset finance market. Let me go to transcend retail, our digital retail platform for OEMs and dealers. The commercial progress this year was real. It's accelerating [indiscernible] automotive, the Fortune 500 leadership group is building its branded digital retail experience on our platform. Our platform is rolling out across approximately 350 franchise dealerships of a premium global OEM in North America, one of the largest digital retail deployments in the U.S. automotive market. The U.S. digital retail market remained large and underpenetrated and our combination of finance and leasing them fast time to go live and a modern customer experience is winning head-to-head evaluations against well-funded competitors. We're the only vendor at the table who also runs the lender side of the transaction, and that is why we will win. We expect that Transcend retail to be one of the most important growth stories in the company over the next several years. Alongside retail, there is a second U.S. growth motion upgrades, our legacy installed base is defined set of accounts where we are the incumbent relationships that, in some cases, spend decades. BMO is a template, legacy to transfer upgrades are now an active category in our pipeline and each updates the maintenance relationship into a modern subscription relationship. A word on AI. It's it's an area of focus for the company, and it's increasingly center to how customers engage with us commercially. During the year, we introduced various product functionalities in the AI-enabled credit decisioning areas, automating manual task, manual task accelerating decision time and the improving underwriting accuracy. And we deployed intelligent document processing systems with AI capability within the platform. All of these have amplified the efficiencies for our clients, and we expect to push forward with that. Another key aspect of our AI focus is our platform has become AI native. So while we focus on presenting products within our platforms, the enablement of our customers to be able to deploy their own AI functional pieces is as important. And the architecture currently of Transcend Finance and retail supports that. and that has been real traction for the pipeline remains strong, supported both by expansion within our existing customer base and by new business development. The pipeline, together with the upgrades and rollouts already signed, BMO, the OEM retail deployment and the extension -- expansion of the customers are taking into new markets is what underpins the guidance Sardar will walk you through. With that, I'll hand over the call to our CFO, Sardar to review the financial results.

Thank you, Asad, and good morning, everyone. Fiscal 2026 was an important year for the company. We delivered double-digit revenue growth, expanded gross and operating margins, nearly doubled operating income and generated strong cash flow. Just as importantly, we are putting in place the financial discipline, operating model and performance metric required to make this progress durable. My comments will cover 5 areas: the rebound and fourth quarter exit rate, the quality of the full year results, the strength and use of our balance sheet, the actions underway to improve earnings conversion and simplify the organization, and our guidance for fiscal 2027. Before turning to the full year, I want to provide a fourth quarter perspective. Fourth quarter revenue was $20.7 million, a record quarter for us, up 12.5% year-over-year. Subscription and support revenue grew 9% to $8.9 million, while services revenue increased 21.3% to $11.7 million. Fourth quarter gross profit increased 27.3% to $13.2 million and gross margin expanded to 63.6% from 56.2%. Operating income increased 40.2% to $4.5 million, representing an operating margin of 21.6% compared with 17.4% last year. GAAP income, net income attributable to NetSol increased 45.9% to $3.8 million or $0.32 per diluted share compared with $0.22. The exit rate is particularly important in the context of our start to the new year. In the first quarter, last year, revenue was $15 million, gross margin was 39.4%, and operating loss was $1.8 million and net add loss attributable to net sold was $2.4 million. By the third quarter, however, revenue had reached a then record $19.8 million, gross margin was 55.6% and operating income was $3 million. In Q4, revenue reached $20.7 million, gross margin was 63.6%, and operating income was $4.5 million. From Q1 to Q4, revenue increased by approximately 38%, gross margin expanded by more than 2,400 basis points and the quarterly operating result improved by approximately $6.3 million. This demonstrates a meaningful rebound in execution while recognizing that time of agreements, implementation milestones and development capitalization can create quarter-to-quarter variability. For the full year, total net revenues increased 12.5% to a record $74.4 million, above our $73 million guidance. Subscription and support revenue increased 8.7% to $35.8 million, demonstrating continued growth in the recurring foundations of the business. Services revenue increased 3.3% to $33.6 million as we progressed major implementation. License revenue was $5 million and included approximately $4.7 million associated with the renewal and amendment of an existing Transcend customer agreement. We want investors to distinguish absolute recurring revenue growth from revenue mix. Subscription and support represented 48.1% of revenue compared to 49.8% last year because license revenue increased this year. We will increasingly supplement disclosure with consistent measures of recurring revenue remain performance obligations and implementation activity. We are also introducing a metric we call contracted revenue. As of June 30, 2026, contracted revenue was approximately $60 million. We define this as revenue expected under existing signed agreements plus our best estimate of change requests from those same customers and same agreements. It is not annual recurring revenue, not backlog and of course, not a guaranteed revenue floor. We will report this each quarter on a consistent basis, and our objective is to grow well above it through transcend deployments, expansion within existing customers, selected new customers and partnerships. Turning to gross profit. Gross profit increased 20.2% to $39.1 million and gross margin expanded 330 basis points to 52.6%. Operating income increased 98.4% to $6.9 million, with operating margin increasing from 5.3% to 9.3%. These are the clearest indicators of improved execution. The results benefited from revenue mix, delivery leverage and the capitalization of qualifying software development costs. We will provide investors with clearer visibility into total product development investment so that the underlying trend remains transparent. Non-GAAP EBITDA grew 22.8% to $8 million. Consolidated adjusted EBITDA increased 68.8% to $9.15 million compared to $5.42 million. Adjusted EBITDA attributable to net sold increased 61% to approximately $6.01 million compared with $3.73 million. The prior year comparison has been recast to exclude foreign exchange gains and losses on a consistent basis. Reconciliations of all non-GAAP measures are included in today's earnings release. Net income attributable to net sold was $2.95 million or $0.25 per diluted share consistent with the prior year. This should be considered in the context of 2 significant movements. First, fiscal 2025 included a foreign exchange gain of $1.3 million and interest and investment income of $1.87 million. In fiscal 2026, we recorded a foreign exchange loss of $0.39 million and interest income of $1.07 million. Total other income was therefore approximately $2.27 million lower year-over-year. Second, income attributable to noncontrolling interests increased by approximately $1 million to $2.65 million. Despite those headwinds below operating income level, consolidated net income increased 22.4% to $5.6 million. We believe that this bridge demonstrates that the underlying operating business improved materially this year, even though the improvement was not yet fully reflected in earnings attributable to NetSol shareholders. Turning to net cash. Net cash provided by operating activities was $13.9 million compared with $0.4 million last year, and cash increased 56.3% to $27.1 million. As we indicated in our third quarter call, the working capital timing that reduced cash at March 31 reversed in the fourth quarter. This is a meaningful improvement in financial capacity. Contract liabilities contributed approximately $6.5 million to operating cash flow, reflecting advanced billings and customer commitments. We do not assume that this working capital benefit will repeat, of course, at the same level year-over-year. During the year, we invested approximately $2 million in property and equipment and $2.7 million in capitalized software development. After these investments, the business still generated approximately $9.8 million of cash. We will remain disciplined in balancing product investment, liquidity, potential strategic transactions and shareholder value. Supporting the 4 strategic priorities Najeeb outlined, our financial agenda for fiscal 2027 is quite straightforward: grow recurring revenue and its visibility, protect and improve margins. apply AI in practical and measurable ways, focus the portfolio on our highest return opportunities and strengthen the conversion of consolidated profit into value for NetSol shareholders. We will apply AI where the outcomes of manageable, faster development and testing less implementation effort, better support resolution and automated back-office processes. That is part of a broader efficiency program that will continue through fiscal 2027. As of June 30, 2026, we employed approximately 1,370 people compared with approximately 1,460 a year earlier, while revenue grew 12.5%. We are reviewing workforce structure utilization location strategy and skills and AI embedded delivery model requires. This is not a head count reduction exercise. It is a disciplined review of how we deploy people and direct capacity towards product innovation, customer delivery and growth. We are also reviewing our portfolio for simplification. This includes assessing products, legal entities, activities against strategic fit, growth potential, margin, cash requirements and management complexity. Capital will be directed to the core asset finance platform and close to core adjacencies where NetSol has a defensible customer and domain advantage. A further strategic priority for us is evaluating minority interest in Pakistan. The Pakistan business is a major contributor to the company, but the increasing allocation of our to noncontrolling interest does reduce how much of our consolidated performance reaches NetSol shareholders. As we have said before, we are actively evaluating structural options to address this over time, subject to valuation funding, regulatory and tax considerations and the rights of minority shareholders. Please note that no transaction has been approved, and we cannot guarantee that our objectives will be achieved in the near long term, and we will communicate when a specific course of action is sufficiently developed. Our growth strategy combines organic execution and selective strategic partnerships, JVs and acquisitions in core and close to core adjacencies. We will apply a strict criteria, product and customer fit, recurring revenue quality, margin and cash profile, integration complexity and a clear return above our cost of capital. We will not pursue scale for its own sake. For fiscal 2027, NetSol currently expects net revenues to grow 13% to 16% over fiscal 2026, gross margin of approximately 50% or better, consolidated adjusted EBITDA growth of 15% to 25%, corresponding to approximately $10.5 million to $11.4 million. This guidance assumes continued subscription growth execution of contracted implementations, disciplined cost management and no material acquisitions. While it's important to note that the timing of agreements, implementation milestones, foreign exchange, customer decisions and advanced billings can create variability between quarters. Our focus will be on full year execution and the quality of growth. In summary, fiscal 2026 demonstrated that NetSol can grow while expanding margins and generating cash. The next phase is to make that performance more predictable, more transparent and more valuable to NetSol shareholders. We will do that through recurring growth, disciplined execution, practical AI adoption, portfolio simplification, thoughtful structural action and rigorous capital allocation. With that, operator, please open the line for questions.

[Operator Instructions] Our first question is from Greg Burns with Sidoti & Company.

Just wanted to first touch on the '27 guidance for gross margins, I guess, it's implying down a little bit year-over-year. Is there going to be a shift in mix? Or what is driving that outlook for a little bit reduction in gross margin?

Thank you for the question. Abu, want to jump in?

Yes. Yes. So I'll take this. So thank you for the question. We are optimistic of our gross margin forecast. We believe that the guidance that we have given of 50% is a stable guidance. It is a guidance that wherever we go into new agreements and also review existing agreements, we do expect a more than 50% gross margin in our business. You saw in the numbers that I quoted that we closed at a higher rate. We expect no reasons why we would not be able to achieve growth in this. But the staple guidance that we like to give the market today is that we will be at least 50% or better. And as we progress quarter-over-quarter, we will continue to monitor and upgrade that guidance as needed.

Okay. And then with the transition from lease peak to Transcend with BMO that you announced. When you do a transition like that, I know you mentioned you're moving from a maintenance to a subscription revenue, but is there any like revenue uplift or margin benefit? What are the additional benefits to transitioning from that legacy platform to Transcend for you?

I mean I'll let Asad answer the question. .

Yes. Thanks, Najeeb. So I think it provides a huge uplift to our subscription revenue. Implementation again, is dependent on how we structure the upgrade with the client. But definite bump up for us overall in our subscription revenue as we move forward with them, which is our primary focus.

Okay. How big is your lease peak installed base maybe from a number of customers?

Yes, lease tax. So it's about 7 customers currently.

All U.S. based.

Okay. All right. And then the Transcend retail in the U.S., can you just give us a little bit more color on the pipeline opportunity. I know you announced 3 dealers that launched maybe earlier this quarter. But could you just talk about the pipeline and why you won there and what benefits you're bringing to the auto dealer market in the U.S.

So -- so I mean, we've got the digital retail space divided into 2 areas. The 3 dealers that you refer to are part of bigger dealer groups. So they all carry more than 15 dealerships within the group. So our primary protocol is to ensure that we get the initiation right in these 3 dealers. And with that, it opens up the other dealerships within the group. So I said we have 2 focuses. One is Tier 1 OEMs, we're doing a rollout for, which is the 350 could potentially turn out to BMO. So that's a space that we have great engagements in. And lastly, on the DGG side, which is where we define dealership groups that we're seeing the traction and you see those 3 dealers, you'll see more coming on as we move forward in the year over the potential of adding 20 -- 15 to 20 dealers average based on the go live of that customer, if that makes sense.

Yes, that does. So when we look across the 3 geographies that you're in, where do you expect the most growth to see the most growth? Is it in the U.S. with the retail part of the business or...

So for me, I think they made momentum for us in all 3 regions right now. As we explained earlier and I presented that our core focus in the U.S. besides Transcend Finance is retail, and we would like to execute there before moving on to other regions. But Transcend Finance, on the other hand, is tracking really well, and you'll see that in the coming weeks, some of the announcements that we make.

Our next question is from Todd Felte with StoneX.