NetSol Technologies Inc (NTWK) 2003 Q4 法說會逐字稿

Good day ladies and gentlemen and welcome to your NetSol Technologies fourth-quarter and fiscal 2003 year-end financial conference call. My name is Jean, I'll be your conference coordinator today. At this time, all lines are in listen-only mode. After our presentation, we'll open the call to questions. Should you require operator assistance while on this call, key star 0 on your tone telephone and we'll be happy to assist you. I'd like to advise you this conference is being recorded for replay purposes. And now I'd like to turn the call over to your host, Miss Marty Tullio [ph], ma'am you may proceed.

Thank you and good morning. Thanks for joining us this morning for teleconference review and webcast of NetSol's financial 2003 fourth-quarter and year-end results for the period ending June 30th 2003. Before we start this morning, there are a couple items that I'd like to cover. First, earlier today you should have received a copy of the press release announcing the fourth-quarter and year-end financial results. If you did not receive the press release, please call me at our offices 949-566-9860 after the conference call and we'll make sure your e-mail information is correct. In addition, I've been asked to make the following statement. The statements in this conference call that relate to future results, markets, growth, plans or performance are forward-looking statements and involve certain risks and uncertainties associated with demand for products and services and development of markets for the company's products and services, as well as other risks identified in the company's SEC filings. Actual results, events, and performance may differ materially. Conference call participants are cautioned not to place undue reliance on these forward-looking statements which speak only as to the day of this conference. NetSol Technologies undertakes no obligation to release publicly the results of any revision to these forward-looking statements that you make to reflect events or circumstances after the date hereof, or to reflect the occurrences of unanticipated events. I would like to introduce you this morning to NetSol's management. Najeeb Ghauri, Chairman and CFO and Naeem Ghauri, CEO. Good morning gentlemen. And gentlemen if you'd like to start the call.

Good morning. This is Naeem Ghauri. First of all, thanks Marty and I'd like to thank you for joining Najeeb and I and Marty this morning, to discuss our financial results for our fourth-quarter and fiscal year 2003 which ended June 30th. Najeeb could you please begin with an overview of our financials for this period? Thank you.

Thanks Naeem and thank you all for joining us this morning. It is a pleasure to be speaking with you and I am pleased to present the earnings of fourth-quarter and for fiscal year ending June 30th, 2003. As reported in our news release this morning, the revenues from operations for the fourth-quarter were $1.2 million. This compares with revenues of over $736,000 during the same period of 2002, which is an increase of 67%. The revenue growth is attributed in part to the tremendous success of our LeaseSoft product which is specially designed for the financial services and leasing industry. For the fourth-quarter '03, we reported the EBITDA loss, which is earnings before interest, tax, depreciation and amortization of $180,000 as compared to EBITDA loss of over $850,000 during the same quarter of fiscal year 2002. In the fourth-quarter '03, we had a non-cash charge for depreciation and amortization of about $236,000. Bad debt provision for about $247,000, and legal settlement charge for $200,000 approximately. The net loss from operations in the fourth-quarter '03 was just about $415,000. This compares to over $1.6 million for the same period in 2002. Not only is this a significant growth to revenue but it also reflects our continuing effort to reduce operational costs and overheads. The gross profit margins for the fourth-quarter rose to nearly 40%. A very positive jump from 11% in the same quarter of the previous year. The improvement in margins is due to increased sales of software licenses and their fees. Now the revenue for the fiscal year ended June 30, 2003 was over $3.7 million. This compares with about $3.5 million in 2002. Posting a modest increase of 4% over last year. This reflects clearly a pattern of bigger growth in sales in the second half as compared to the first half of 2003. In the year-end 2003, we posted an EBITDA loss of just about $500,000, versus EBITDA loss of about $3.9 million in 2002. The total depreciation and amortization charges in 2003 were $1.6 million approximately. The total bad debt provision, which is a very conservative provision, this year was about $415,000 in 2003. The total salaries and raises were reduced to less than $1 million from $1.45 million in 2002. This is a reduction of 37% in the fiscal year 2003. The profession and non-cash related compensation decreased significantly to closer to $172,000 in '03 from almost $975,000 in '02, a reduction by 72%. G&A expenses reduced by almost 15% in 2003 when compared with fiscal year 2002. The net loss for the year 2003 was about $2.1 million or 9 cents loss per share. This compares with almost $6 million loss in 2002 or 40 cents loss per share in the fiscal year 2002. It must also be noted for fiscal 2003 that without the onetime settlement expenses and a very conservative allowance for bad debt provisions, our EBITDA would have been up by almost $57,000 in fiscal year 2003.

We have improved the bottom line by approximately $4 million this year, which is much better than what we had projected in our guidance earlier in August this year. This clearly demonstrates the tangible results of better managing our costs, focus on improving productivity and adhering to the highest quality standards. I'm also pleased to report that our gross profit margin ended up as 52% in 2003. This compares with about 20% in 2002 which is a solid improvement by 218%. Again, this demonstrates overall increasing sales of our LeaseSoft products and services. The cash solution at the end of the fiscal year June 30th 2003 was approximately $250,000, but as you may know, right after June 30, in the beginning of July '03 we closed a new product placement financing for over $1.2 million. This was publicly announced in July of 2003 and there were over $4 million value of outstanding bonds and options on exercise by investors such as DCD Group and the employees of the company. The company also has $1 million standing line of credit, through the DCD Group which was also announced awhile back. We're investing most of the funds raised in the technology campus, infrastructure enhancements and new business development initiatives, and constantly improving our quality standards. We feel we're in a stronger cash position as compared to 2002, and we only had $87,000 cash available as reported at that time. With this very positive report on fundamentals, I would like to turn the call to Naeem Ghauri, the CEO, for an overview of what accomplishments made in the year 2002, 2003 and an outlook of fiscal year 2004. Naeem?

Thanks Najeeb. Ladies and gentlemen, throughout the year, we have continued to focus on positioning the company for growth and profitability in 2004. And we believe we've made significant headway. One of our key goals was to achieve FEI Siemens Level 3 rating and we accomplished this in less than 16 months. This means that our development facility has been recognized by the Carnegie Mellon Software Engineering Institute as having an operational methodology that ensures enhanced product quality resulting in faster project turnaround and a shortened time to market. Our customers benefit by receiving quality products on time and at a lower price. Only a few companies worldwide have achieved this rating and NetSol is the only software development and information technology company in Pakistan with a Level 3 rating. Our goal is to be rated Siemens Level 4 within the next twelve months. Speaking of our new Siemens Level 3 rating, this is a perfect time to discuss our new technology campus in the whole Pakistan. As you might recall, ground was broken in January of 2000, with the completion of Phase 1 expected in fall of 2001. Due to delay in financing and other challenges facing the company at that time, completion of Phase 1 was delayed. However, today I'm pleased to announce that Phase 1 is nearly complete and our whole operation is expected to move into the technology campus before February 2004. By relocating the entire operation into our new campus, we will save approximately $150,000 annually. Once fully operational, the campus is expected to house over 2,500 IT professionals and software engineers. Lahore is Pakistan's second-largest city and has a population of 6 million and is home to most of the leading technology academia resources. And has a newly constructed international airport located five minutes from our new campus. We will put our new campus to use as we have entered into 3 significant partnerships over the last several months. We believe these partnerships will be instrumental in NetSol's continued growth and success.

We have entered into a partnership agreement with Hyundai of South Korea on 2 joint ventures. The first joint venture with Hyundai was for formation of a bidding consortium to automate approximately 28 passports and visa offices within Pakistan along with 10 Pakistani embassy locations worldwide. We have a strong team with extensive experience in handling such large complex projects and have earned a stellar reputation within Pakistan. Shortly after the first joint venture was announced with Hyundai, we entered into a second joint venture agreement with Hyundai under which NetSol and Hyundai will work as a team on several other infrastructure development projects within Pakistan. We believe this agreement positions our team to bid for large mission critical projects primarily involving the public sector as well as the defense sector. Our subsidiary NetSol Connect has been successful as a regional Internet service provider in Pakistan. But with the recent 49.9% acquisition of NetSol Connect by UK based Acta Group (phonetic), we believe the newly-named NetSol-Acta Limited headed by Acta's CEO Hamai Imogo (phonetic) will grow from a small regional ISP to a national provider of cost-effective broadband Internet access to both residential and commercial users, replacing the current dial-up infrastructure in Pakistan. The recent deregulation of the telecom industry in Pakistan offers a huge business opportunity for NetSol-Acta which will monetarily benefit NetSol Technologies, the parent. Our third and very important relationship announced earlier this month is with Intel Pakistan. It is often very difficult in the news release explaining the importance of working with such a large international company. Intel Solutions Blueprints provides tested and proven enterprise solutions for Intel-based servers with a commitment by hardware, software and solution integrators to make the solution easily repeatable for other businesses to quickly deploy.

Each solution specifies business needs, solution benefits and deployment guidelines including application software, middleware, operating systems platform and hardware platforms. LeaseSoft's competition (inaudible) host in the retail financing market is predominantly Legacy systems that are based on very old technology. We optimize our software for Intel's best of breed 32-bit environment. Additionally, we have already begun a development product to make LeaseSoft available in Intel's 64-bit platform. This new relationship will allow us to feature and market our LeaseSoft.cap product on Intel's web site. This has been a year of tremendous opportunities for NetSol's management team and its dedicated employees. We've made significant progress during the year and most importantly we have positioned the company for significant growth through our partnerships, acquisitions, new target markets and entry into the U.S. and Europe. Now we'll just like to go through guidance for fiscal 2004. Going forward, we are experiencing better visibility in sales tracking and traction in actual sales. It is important to note that the company's concurrently in the running for several large IT services and LeaseSoft-related projects. This is a significant turnaround in our position when compared to last year. It is also worth noting that the space NetSol operates in is experiencing a major turnaround worldwide after nearly three years of stagnation. Let's quickly evaluate our positioning to give you some sense of the company's upside. If you look at the bottom of the charts in the press release that we put out, you'll see a table that gives you some high-level numbers -- gives you good comparables in terms of where we were and where we are. Now I'll just go through some of those points. When comparing Q4 '03 to Q4 '02, revenues grew by nearly 70%. Cost of sales grew by just 14%. And selling, general admin expense actually decreased by 67% and that demonstrates that we have increased operational efficiency to an optimal level. We have achieved this operational efficiency while we have continued to improve quality by initiatives such as Siemen delivers measurable quality in our internal processes.

We believe our revenue base is still modest compared to our capability, capacity and the peer group of companies we operate in. We can meet our guidance of increased revenue of 60% plus without increasing cost of sales and selling, and general and admin expenses by the same percentage thereby improving the bottom line significantly. So the real substance behind our guidance comes from several fundamental shifts in the environment we operate in. The technology sector is beginning to pick up momentum in new spending. Three years of freeze in spending has created a pent-up demand. There is stability after the crisis of 9/11 and the SARS epidemic. NetSol service offerings have now delivered at Siemens Level 3. NetSol has key strategic partnerships with Intel, Acta [ph], Hyundai. NetSol projects have multiple life size, which are running multimillion dollar portfolios. NetSol management has overcome the compliance issues with NASDAQ and has little or no distraction from running the businesses. The company has reduced liabilities and strengthened its cash position. The stock price has stabilized providing more funding opportunities. And finally, the improved Pakistan economic fundamentals are giving a new impetus to business development. In conclusion, ladies and gentlemen, we reiterate our guidance for fiscal '04 as follows. We expect to grow our revenues 50-70% for fiscal 2004. We have a strong infrastructure that can sustain this growth with minimum cost. We've significantly improve our bottom line with the last 3 quarters and for the year. Our goal is to make this company a leader in its space. And our focus is to continue to grow the top line and become a sustainable, profitable enterprise with a differentiating franchise and incrementally enhancing shareholder value. I would now like to turn it over to the operator to put forward any questions.

(CALLER INSTRUCTIONS) Your first question comes from Robert Pitrazza [ph] of Tigger Trading [ph]. Please proceed.

Could you shed some light on what the revenue potential is as a result of the partnership with Intel? How big is that?

This is what we call in industry as positioning ourselves for opportunities. If you've visited the web site on where we have positioned ourselves, Solutions Blueprint are tailor-made specific industry solutions which Intel programs with you. So what we have is LeaseSoft positioned in that space as the only company that offers asset-based finance solutions to a feature on their website. So we believe together with Intel, it creates more visibility, more exposure for NetSol as a solution provider in the asset-based leasing business. So the opportunities, there will be many directly and indirectly as a result of that relationship. We also will participate in many events with Intel. For example, we may be visiting several countries with them where we will team up as offering an interim solution based on Intel servers.

Thank you.

Your next question comes from Dave Weinberger [ph] of Vertical Capital [ph]. Please proceed.

Congratulations first off on your quarter and your year-end. You signed several contracts over the last several months. I was wondering why is it that you can't mention the company's name or the dollar amount?

That's a good question.

Naeeb repeat the question for the rest please.

The question is basically that why don't we mention sometimes the revenue on the contract or what the projected revenue might be and as well as the company name. The space we operate in sometimes is highly competitive both for us and for our clients. And sometimes they do not want to give away of what their spending might be in a certain initiative, for competitive reasons and sometimes we don't want to -- also not to alert the more powerful competitors to go after the same company and the same businesses. So really, the reasons are two-fold. Sometimes it's the client's wish and sometimes it's our wish not to attract too much interest from competitors as well.

Okay thank you very much.

[OPERATOR INSTRUCTIONS]. You have a follow-up question from Mr. Dave Weinberger. Please proceed.

Again, you had mentioned about a month and a half ago, 2 months ago your Hyundai deal in the passport visa. Approximately how large is that contract? Can you give a percentage of how large that will be? And what is, if you should win this contract, what percentage of that dollar amount would you receive?

Okay first of all, with Hyundai, we signed 2 partnerships, this is very specific to the passport project and there's another one which is more general on any infrastructure project. The MRT project which is the one you're referring to, potentially is quite a large project but it is split between the solution provider, which is Hyundai has a solution, the integrator, and the hardware manufacturers. Now NetSol's role in this is as an integrator and onshore support and all customer relationships and so on. The overall project can be in 10s of millions, anything over $10 to $80 million but out of that, NetSol's role is really as an integrator and a local support. The chances of winning is very premature. I can tell you this much that we -- there were 19 companies that had entered the contest in bidding. There was a shortlist, we made the shortlist. But it's a long sales cycle, we're at the mercy of bureaucrats. We had not factored in any of this revenue in 2004, and in fact, we've not factored in any of the revenue from Hyundai relationships in 2004. So if anything comes through in 2004 will be a bonus, but I would just caution that these type of projects where you're dealing with the government and the bureaucrats tend to be -- tend to have a very long sales cycle. I hope that answers the question.

Yes, it does. So then without any of the contracts that you guys are currently bidding for, not taking any of those into any consideration, you guys see 60 to 70% revenue growth?

We see some of that as organic, and some of those are based on some of the projects we're bidding for, but we're not any of the large ones I mentioned in my guidance. Those we considered to be a bit of a bonus, because they tend to have longer sales cycles. So than could get surprised and have one into '04, then we may reissue guidance.

Okay. That sounds good. Thank you very much.

Your next question from Charlotte Sharp [ph] NetSol Technologies. Please proceed.

First off, I want to say great work, and I know you all have worked very hard getting this turned around. You hadn't mentioned Pearl Treasury Systems, software yet. Do you expect that to be marketable anytime soon? And do you have a preliminary customer base in line to use that financial software, once it's completed?

PTS, we didn't mentioned, purely because it's in developmental stage. To give you a brief background, we acquired this company because of what we saw in the product itself, and what we saw as the potential in the market. This treasury-based product is a mainstream product in the banking world, and in fact treasury systems are used by all major corporations, not only just banks. PTS was backed by venture capital, and they invested several million dollars building the product, but they ran out of money. So at the point we took it over, it was about 80% complete. What we have is a program over the next year, which has several major milestones. The first key milestone for us is to produce a demo product, which we anticipate to be ready in the first quarter of next year, which is the next calendar year. So we anticipate having a demonstratable product around February/March of next year. We have several potential customers naturally, before we bought the product, we had done our research, who are interested in looking at the product, and we intend to do some kind of a soft launch around March, with the demo that we have, and then we anticipate a proper launch in, I believe the second or third quarter of next calendar year. Just also potentially, PTS for us can be a very, very important product in our portfolio, and related in the space that we are in, in the banking and financial application space. This will be a stellar addition to our product line.

Are there any possibilities with Intel doing something similar like you have done with LeaseSoft, as a solution blueprint?

Well you know, I don't want to give it all away here, but certainly, positioning is important. It could be Intel, it could be somebody else we partner with, but we were very, very excited about PTS. But I think at the right time, you will start to hear more about how we are taking the forward.

Thank you.

You're welcome.

[CALLER INSTRUCTIONS] There seem to be no questions at this time.

Okay, ladies and gentlemen, I thank you all for participating. We will keep you posted with the developments in the company and we appreciate your support. And we hope to speak to you in our next conference call for the next Q. Thank you very much for attending. Have a good day.

Ladies and gentlemen, thank you for your participation in today's conference. You may now disconnect.