NetSol Technologies Inc (NTWK) 2006 Q4 法說會逐字稿

Good morning, ladies and gentlemen. My name is Carly and I will be your conference operator today. At this time, I would like to welcome everyone to the NetSol Technologies fiscal year-end financial results conference call.

All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer speeder. [OPERATOR INSTRUCTIONS]

It is now my pleasure to turn the floor over to your host to Ms. Marty Tullio, managing member of McCloud Communications. Ma'am, you may begin your conference.

Thank you. Good morning. I'd like to thank you for joining us this morning for NetSol Technologies fiscal 2006 year-end financial conference call.

With me this morning I have Najeeb Ghauri, Chairman of NetSol Technologies, Naeem Ghauri, CEO, Tina Gilger, CFO of NetSol Technologies.

Before we start today's conference call, I've been asked to make the following statement. The statements in the conference call that relate to future results, markets, growth plans or performance are forward-looking 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 that have been 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 may speak only of the date of this conference call.

NetSol Technologies undertakes no obligations to release publicly the result of any revisions to these forward-looking statements that may have been made to reflect events or circumstances after today's date or to reflect the occurrence of unanticipated events.

I'd like to turn the call over to Najeeb Ghauri. Good morning, Najeeb.

Thank you, Marty, and good morning. This is Najeeb. I'd like to thank you all for joining us along with Naeem, our CEO and Tina Gilger, our CFO, to discuss 2006 fiscal year-end results and conference call.

Earlier today, as you know, we issued a press release for the fiscal year-end 2006. I will have now Tina Gilger to begin the review of our numbers of our financial performance this year. Tina?

Thank you, Najeeb. Good morning and thank you for joining us on today's conference call.

I am pleased [technical difficulties] the year ended June 30, 2006 for approximately 18720 as compared to $12.4 million for the year ended June 30, 2005. This is a 50% increase in net revenues.

Net loss for this year was $4 million, or net loss weighted average share $0.09 versus income of $663,000, or income per weighted average share of $0.06 for fiscal 2005. [Technical difficulties] LeaseSoft Increased in addition, our revenues from services and maintenance fees increased significantly.

I'm also pleased to announce that gross profit was $9.7 million for the year ended June 30, 2006 as compared with $7.7 million for the fiscal year 2005. This is a 26% increase over the comparable period for fiscal 2005.

Gross profit margin for fiscal 2006 was 52% versus the gross profit margin of 62% for fiscal 2004. The slight decrease in gross profit margin was due to hiring more than 90 technical personnel in fiscal year '06 creating five new business divisions as well as the quality standards associated with achieving the assessment [inaudible].

The Company has invested heavily in its infrastructure, both in people and equipment during fiscal year 2006 as it situates itself to increase growth organically and from the acquisitions of CQ in February 2005 and now McCue Systems Incorporated in June 2006. This is reflected in our increased salaries and depreciation expense. As these investments mature, management believes that margins could increase as high as $0.70.

The operating expenses for fiscal 2006 were [technical difficulties] compared to $6.6 million in fiscal 2005. This is an increase of 50%.

However, as a percentage of sales, operating expenses were 53% for both years. The [inaudible] increase as a cost for adding several new offices, including one in Beijing, China, and increased costs of audits and other corporate governance.

In addition, as a reflection of our commitment to giving back to the community, we donated $199,000 in fiscal '06 for various natural disaster tragedies.

EBITDA, which is earnings before interest, tax, depreciation, and amortization for fiscal 2006 was approximately $2.2 million compared to $2.9 million for fiscal 2005.

We are pleased to report that on July 5, 2006 the cash payment of $1.97 million due to the CQ System shareholders for the final payment of the acquisition was made. We also paid the first installment of $2.11 million to the shareholders of McCue Systems, our newest acquisition.

We are extremely pleased to announce that in fiscal year 2006 we sustained three quarters of solid quarter growth, but fourth quarter [inaudible] much of the brunt of our M&A and global expansion costs. It's important to note that our business model in 2006 was based on aggressive growth that had a net impact on our net earnings in the short-term.

However, as evident in previous quarters, once this growth moves past the inclusion stage, it has a direct impact on top line growth, a by-product of our growth strategy is in sustaining [inaudible] losses in several areas on the balance sheet, but as you can see from our results recorded this morning, we are continuing to see positive results from our increased growth profits and net revenues. Our fourth quarter results [inaudible] in 2006 due to mergers and acquisitions, global growth and other costs, but our outlook for fiscal year 2007 remains very strong.

Our fiscal year ended 2006 cash, cash equivalents, and certificates of deposit totaled approximately $4.2 million and our net stockholder's equity has also increased to more than $26 million. In August of this year, I'm pleased to report I was able to visit our Pakistan offices and was very impressed with the professionalism and dedication of our staff there.

I will now turn the call over to Naeem Ghauri for an overview of our business development and marketing accomplishments. Naeem?

Thank you, Tina.

In fiscal year 2006 the Company has kept its solid growth momentum signing several new LeaseSoft and services contracts ranging from $200,000 to over $1 million in value. In the U.K. several new financial organizations, such as [Anestek, Hadok and Petirdo], to name a few, have signed new licensing agreements.

In Australia, we entered into a long-term contract with Australia Motor Finance and [inaudible] Financial Services in Thailand have expanded their original contract to include a new state of the art middle and front office product [CAP.net].

The CQ acquisition is reaping dividends as it has opened up the European market to our LeaseSoft product, which complements perfectly the CQ product portfolio. And as a result, we are witnessing great synergy and integration between CQ and the rest of the group.

On July 1, 2006 we completed the U.S. acquisition of MSI, that's McCue Systems, and will be applying similar best practices in creating synergy and new openings for cross-selling the McCue product, LeasePak, into our growing footprint.

In Pakistan, we are the preferred solution provider for a number of key government infrastructure projects. Some very large automation projects are in our pipeline. We expect to see some of these to convert into contracts in the current fiscal year.

We are in a very unique position. Globally, we are probably the only company to have [inaudible] credit and asset finance solutions in every major market in the world from Asia Pacific to Europe and North America.

We are placed favorably in several large bids in the LeaseSoft space and expect to see closure and [inaudible] for some of these bids. We have seen exceptional performance from our NetSol TiG [all-service] joint venture in the fiscal 2006, growing from a zero start in February 2005 to running at over $2 million currently in revenue.

Our main development facility in Lahore achieved a rare honor of a CMMI Level 5 rating by the Carnegie Mellon Software Engineering Institute and the software, a very [inaudible] sort of selective group of less than 100 companies worldwide. We are on a very steep growth trajectory where many of the prospects in the pipeline can take us into exponential growth over the medium to long-term. It is this expected growth that is driving our expansion in human resources and infrastructure.

We believe in the opportunities and our ability to close them and therefore investing in this aggressive expansion. We anticipate the demand for NetSol's products and services in both the private and public sectors to continue to drive net revenues and gross profits as we begin to capitalize on our investments and take advantage of the emerging and the mature markets we are now proud of.

I would now like to turn the call over to Najeeb to provide an overview of the Company's operational initiatives. Najeeb? Thank you, Naeem.

As I remarked earlier this year, the mark of a successful global player is the ability to scale the business organically and through strategic acquisitions to grow beyond a reasonable presence in several countries to an enterprise provider that can service customers anywhere in the world has been achieved.

In 2006, we made a conscious decision to invest in the hiring of new people to support our revenue projections of $30 million and beyond, strengthening our infrastructure, pursuing an acquisition strategy, expanding our sales and marketing efforts worldwide. This decision propelled NetSol into a true global company with [regal] solution in three key markets, North America, Europe, and Asia Pacific. We're now a truly global enterprise.

The growth and expansion has come at a cost to our fourth quarter bottom line, but having gained our new hard-earned status in the world marketplace, we're now committed in fiscal '07 to a solidification of our assets and a refinement of our operations that will increase profitability and shareholder value.

The Company's dramatic increase in our net revenues in year-over-year comparables is a positive indicator that our September 11, 2006 guidance for fiscal 2007 of approximately 50%, or $30 million revenue growth is on target.

In our current fiscal year of 2007, we are beginning to see the benefits of being a global player, as larger companies inquire about our bidding process and technical expertise. We can now meet the challenge. We have positioned our company to attract more worldwide business and as it comes our way in 2007, I'm confident that our earnings will increase with subsequent benefits to our long-term relationships.

I would now like to call the [inaudible] to ask questions on areas of specific interest. So operator, will you please initiate the question-and-answer session?

Thank you. [OPERATOR INSTRUCTIONS] Thank you. Your first question is coming from Debra Fiakas from Crystal Equity Research.

Good morning. And, of course, this morning I'm calling on behalf of Westrock Advisors.

I wanted to ask you about your plans going forward in this '07 fiscal year, if you plan to continue adding to staffing and what categories that hiring might be in?

Naeem, do you want to answer that? Sure. Debra, we see our expansion has been mainly in the government sector and also in the private sector in Pakistan where we've opened up several new services divisions. They are in the banking, financial services, e-government, defense, et cetera, so really that expansion is very localized for the local markets where there are some very, very large projects in the pipeline.

And so the hiring we've done so far is to essentially be able to allow us to sell the services and create some basic competency. As we get new business, there will be further expansion, but that will be based on actually signing contracts now.

We have done enough hiring to be able to demonstrate capabilities. So really, I see this fiscal year, the hirings will come as and when we write new business.

Okay.

So apparently -- can you give us some idea of this government services pipeline, can you quantify it in any way in terms of, say, bids outstanding or do you have a backlog and a figure for that category of business?

Backlog figures are difficult to sort of solidify, but I can tell you that we've got six new divisions and all servicing the local markets in Pakistan. There has been a big inflow of government money into these projects where automation had been frozen for a number of years and now the government, with the help of the World Bank and several other international donors, have decided to implement some of these projects, which have been sitting there for years.

So we are in a very, very strong position and bidding for, in fact, every major project within IT, NetSol is a preferred vendor, we get invited to bid. So I can say there are more than 15 to 20 different projects that we are bidding for and all probably over $1 million or more and some are several million dollars worth of projects. So it's difficult to sort of say how big that number can be, but really it reflects in our guidance on what we're hoping to close in this year in addition to our LeaseSoft sales.

Okay. And then just a couple of follow-up questions to what you've just been mentioning.

What is your current number of employees or headcount for the Company? And then how much of that is in the development facility in Lahore? Najeeb, do you have the numbers?

Yeah. I think, Debra, the technical resources, if you just break down, Lahore has about 425, something like that. Of course, there's admin and operational accounts people also, but about 425 technical that they are servicing, LeaseSoft, local businesses, McCue, CQ now and, of course, the TiG model. So that's about the number we have in Lahore.

Of course, as you know, we have two other development shops in San Francisco and on [Horsham] where they [inaudible] McCue and gradually [inaudible] building training for these people to outsource them to [inaudible], so eventually there'll be some reduction in these shops.

Okay. And then just one more question.

Given the fact that you have this large group of projects that you've bid on, do you expect those to begin and be awarded in the coming months, six months, I just want to get a sense of timing as to when you anticipate that increase in business in the government services area.

Debra, this is Naeem.

The way we've given the guidance, what we see is that first two quarters we'll see mostly sales coming from our LeaseSoft and within LeaseSoft [other] services and maintenance. This is really our guidance which is coming from underpinning which is given by LeaseSoft and LeasePak.

But in the last two quarters of the fiscal, we're starting to see some, we will start to see some contracts from the government space, but with the government, there is bureaucracy, as you know. Sometimes these get awarded as when they plan to, but sometimes they do get delayed. So we have put in enough contingency in our guidance to address any projects that get held back or get delayed.

We are very confident in the guidance that we've given that even if these are slower in coming, LeaseSoft and LeasePak, within between the two products we'll be able to deliver those revenues. As you also know, this is Najeeb, Debra, we have always delivered the guidance that we've given the last two or three years or so, I believe. So we're pretty comfortable with the numbers.

Excellent. Thank you.

Thank you. Your next question is coming from Leo O'Brien from Shamrock.

How are you guys doing?

I was wondering what was going on in China, specifically, when you expect to see some revenue from your operation there? And secondly, what your overall expenses are for that operation?

Leo, this is Naeem.

In China we already have revenue. We've got three customers now. One we haven't announced because of confidentiality, but two we have announced, we have Mercedes-Benz Finance, and we have Toyota. Two customers which are already bringing revenue.

The third one is another major automotive blue chip name, we will be announcing that contract shortly. But really, all three of them are revenue generating.

We have a very small overhead in China. We have just one key sales representative and we, from time to time, bring people from Lahore to implement and service the customers. The team really sits in Lahore for delivery and then [inaudible] travel to China when they have to deliver.

These two customers that you said that you already have, were those already realized before you opened up shop there?

No, we had -- we were in discussion with both of them and as we set5 up the office there, they started to materialize.

So you're licensed to do business there, then?

Oh, we are, absolutely. We are signing business, we have signed three contracts.

Okay.

Now it sounds like the business that you have there is automotive-related. Do you have any other plans to branch up from the automotive business in China?

Well, we are, you know, for automotive for us is the low hanging fruit because we're also strong in Asia in automotive, that we have so many strong references, and for us, if you like China, every major automotive captive finance company is potentially our customer. So that is quite a big market in its own right.

Really, we have enough in the pipeline to be sort of not looking at too many other sort of non-automotive type of businesses, but they do come our way and we do deal with them, but it's really the automotive side is one we are more bullish on. I think also -- can I make another comment? We are only, I think, solution provider in this domain in China in the [inaudible] finance [inaudible]. That makes a pretty unique company to be in China with the growth, the opportunity in China. So we're in great position there.

Okay. Thank you. Good luck.

[OPERATOR INSTRUCTIONS] Your next question is coming from Chad Woods, private investor.

Thanks for taking my call.

A couple of questions on, one, what is your cash and cash equivalents currently? I noticed that what your posted on your balance sheet here is as of June 30th and it looks like you made the payments to CQ and McCue after that?

Let me comment --

The payment for CQ and McCue are reflected on our balance sheet as the restricted cash. So those payments separated out of cash and cash equivalents.

That makes sense then.

As far as the guidance for next year of 10 to $0.13, what's a dollar figure on that? How many shares is that based on outstanding?

I mean can you quantify that more, is it $1 million you expect to earn next year, $2 million. Because you're giving a guidance of 10 to $0.13 and with the new shares coming on line, I'm not really sure what that 10 to $01.13 is based on, the number of shares it's based on.

I think this picture will be much more clear in terms of real quantification of numbers in the first quarter, when we deliver first quarter number, you'll get it. But we are pretty comfortable the way we have done this projection based on our cost structure.

And, of course, we take into consideration outstanding shares based [on] potential new shares issued due to these acquisitions we have just done. I think Tina came up with a pretty solid formula, right? That gives us this 10 to $0.13 EPS.

That based on 16, 17 million shares outstanding that are coming on line from this convertible and stuff or is it based on 14 or 15 that you have?

It's actually, [inaudible]. The question is quite relevant. About 17 million if I recall.

Okay. Great.

As far as -- I noticed there was some more option grants recently. Are you all accounting for that yet? I mean in your earnings number with all the scrutiny right now over option grants and accounting for that in your earnings, are you all tracking that --

Our company didn't fall under the FASB 123R until July 1st of this year. So for the fiscal year 2006, we were accounting with the previous standards of the intrinsic value.

I know it's like some of the bigger companies are having to go back, and you're telling me that that's not the case with --

No.

Okay. Not the case.

And just one more thing on the, I'm just curious to know what the thought process behind releasing guidance back in September was? I mean you had a big run up in the stock, I think it peaked out at around $2.22 and then, I'm guess I'm really asking, if you knew that this quarter was going to be not a great quarter, what was the thought process in releasing back in September and then having the stock run up, and then essentially, if you got new shareholders at that point they're setting under water and frustrated at this point.

I didn't buy on the run up, but I'm curious as to why you would have released that instead of waiting until today to give guidance?

I can answer the [inaudible].

I think this is obviously a very difficult thing to position when to do it and should we do it at all, you know? We only said if they, to look for '07 some kind of direction from the Company what really these acquisitions means to us between both McCue and CQ and all the other things we're doing.

So there was, quite frankly, a lot of, I think the reason for us to, at least some kind of in direction. Now, naturally, we were hoping that this will continue because this was a June 30 is not behind us '06 and we were setting the stage for the future direction of the Company. Najeeb just read, you know, when we gave guidance the stock was really, the stock had already run up before the guidance, so the proposed guidance stock did not run up. Whatever run up happened was pre-guidance. If you check the closing prices over the last month or, so you'll find that.

[*Inaudible] our timing was, as Najeeb said, that there has to be some clarity on what the impact of all these acquisitions is. And a lot of people were asking questions on how next year will pan out with two major acquisitions coming on line.

And the other thing was that our guidance last year was mostly for top line so we never guided to the earnings per share. If you look back, the guidance we gave for the whole year of 2006

So really that sort of implied that we had major challenges with expansion and integration, integrating the two companies. So we were more focused on the top line and, really, that guidance we've met and so we are very happy with the results.

Okay. Great. And last thing, and again, I wish you guys a lot of luck, I hope the Company continues to do well.

Last question is on a contract that you mentioned a couple of quarters back on the conference call. I don't have the -- I think it was a contract in the U.S. that was also integrated with TiG in some way.

Maybe I'm wrong on that, but a contract that you talked about that was significant in the U.S., has that contract gone away? Is it still in the work or has it already been announced?

Okay.

I think what you're referring to is two quarters ago, we were in the process of the acquisition of McCue. And I remember this now, the comment was that we were doing something significant in the U.S. and I think it was referring to the McCue acquisition.

Okay. Yeah, that's right. So it wasn't a specific contract. Okay. Well, good luck, guys. Thanks for taking my call.

You're welcome.

Thank you. [OPERATOR INSTRUCTIONS] Your next question is coming from Paul Cooney of Maxim.

Hi, guys. I've got a couple of questions.

I think you might have answered this already, but did, is the expenses for the McCue acquisition baked into the numbers that were already released?

Tina?

Most of the expenses for the McCue acquisition have been able to be capitalized as part of the acquisition cost and so those will be reflected in our amortization of intangibles over the next few quarters.

Okay. And do you expect to return to profitability this quarter, in the first quarter?

This is the, we've guided for the year and the way we work our guidance is that we see overall what deals are in the pipeline and what is our cost base. And based on that, it's difficult to give guidance quarter-on-quarter especially we are so close to within the next four or five weeks to declaring results of this quarter.

But what we're saying is our guidance will track a run rate to the yearly guidance. It's difficult to break the guidance down to quarter-by-quarter.

Okay. Thank you.

Thank you. Your next question is coming from Debra Fiakas of Crystal Equity Research.

Thank you.

I just had one follow-up question on the spending rates, both in terms of the fixed costs or the costs of your sales and also your plan for spending on marketing and administrative expenses.

It's understandable that you're gearing up to win new business. Do you expect to continue to spend at the rates that we saw in the fourth quarter, or were there some unusual expenses recorded in the fourth quarter?

Well, I'll just give you from the marketing side some answers, Debra. Especially in this year, with the CQ acquisition, we invested quite heavily into rebranding CQ and also introducing LeaseSoft in Europe and U.K.

We also invested quite heavily in creating new branding for LeaseSoft in Asia Pacific so all our material collateral has been renewed. That investment, we believe, is enough to keep us going for the next couple of years so we don't expect to make any major investments in marketing, not like what we did last year. This year will be more incremental and it will be way below what we said last year. So we expect to see some reduction in marketing costs.

Okay. Excellent. Thank you.

Thank you. There are no other questions. I'd like to turn the floor back over to management for any closing remarks.

Yeah, Naeem, do you want to do the closing? Sure, absolutely.

Well, ladies and gentlemen, thanks for joining us this morning. Really, the message was very clear from our numbers that NetSol is poised for significant growth in the coming quarters and years and we've come from a $3.7 million revenue base about three years ago, we expect it to grow to over $30 million in this current fiscal 2007.

And this is really because with every passing year NetSol improves its unparalleled product and service offerings, is building [off] infrastructure and is increasing its capital by hiring the best and the brightest team members. So really, our drivers for success are in place and we are looking forward to updating you in the coming quarters, and thank you very much again for joining us. Have a good day. Thank you, all.

Thank you, ladies and gentlemen. This does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day.