NetSol Technologies Inc (NTWK) 2007 Q2 法說會逐字稿

Good evening. My name is Felicia, and I will be your conference operator today. At this time, I would like to welcome everyone to the NetSol Technologies second quarter fiscal year 2007 financial results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. [OPERATOR INSTRUCTIONS] Thank you.

Mr. Christopher Chu, Investor Relations representative, you may begin your conference.

Thank you, operator. Hello everyone and thank you for joining us on the NetSol Technologies Inc. second quarter fiscal year 2007 financial results conference call for the period ending December 31, 2006.

Before we begin, I would like to read a brief Safe Harbor statement. This conference call may contain forward-looking statements. These statements reflect the current belief of NetSol Technologies management, as well as assumptions made by and information available to NetSol. Forward-looking statements are not guarantees of future performance, and involve risks and uncertainties.

Actual future results and developments could differ materially from those set forth in these statements, due to various factors. These factors include among others, changes in the general economic and competitive situation, particularly in NetSol's businesses and markets. In addition, future results and developments could be affected by the performance of financial markets, fluctuations and exchange rates, and changes in national and super national law, particularly with regard to tax regulations.

The Company assumes no obligation to update the forward-looking statements. During today's call, Mr. Najeeb Ghauri, Chairman and Chief Executive Officer, will share an overview of the business, and financial results for the second quarter and first half of fiscal year 2007. He then will hand the call over to Ms. Tina Gilger, Chief Financial Officer, to review more specific details of the financial results. Mr. Ghauri then will return to share some perspective on the Company's strategy and markets going forward.

I would also like to remind participants that we are webcasting today's call live. The webcast may be accessed in the Investor Relations section of NetSol's Website, http://audioevents.mshow.com/322520/. An archive of today's webcast also will be available on the NetSol Website, www.NetSolTek.com.

I would now like to pass the call over to Mr. Najeeb Ghauri. Go ahead, Najeeb.

Thank you Chris. Hello everyone. Good afternoon, and thank you for joining us today to review our second quarter and first half of 2007 financial results. As the press release issued earlier this afternoon demonstrates, NetSol Technologies had a strong second quarter. Revenue rose 60% to $7.2 million, driven by our ability to close contracts in the Asia Pacific and the European markets. Operating income rose to 36% to $375,000. The bottom line was adversely impacted due to a one-time, non-cash charge of $4.3 million, relating to the acquisition of McCue Systems last June, and due to accelerated integration costs for both CQ and McCue Systems acquisitions.

If exclude the one time charge, NetSol would have reported EBITDA of $0.03 per share and diluted share, and a net loss of $0.02 per basic and diluted share for the quarter. All charges related to the acquisition of McCue Systems are now behind us. So we may move forward aggressively in the non-American market. We are currently aggressively training over 25 new programmers, who we plan to eventually handle about 50% of the U.S. and U.K. onshore developments. We expect to have the North American division substantially integrated into the Netsol organization, and leveraging our superior offshore capabilities by the end of this fiscal year.

Now let's review how we achieved these good results. First up is in the Asia Pacific reason, NetSol's APAC division signed two new multi-million dollars contracts for LeaseSoft, the Company's flagship vehicle portfolio management system, with global blue chip brand names in the Captive Finance sector, one in Australia, and the other in China. In addition, the APAC division continued to expand its pipeline of opportunities in Australia, Thailand, New Zealand, and in China. In fact, based on recent wins and the current sales pipeline, we believe that NetSol will become the defacto standard for captive auto finance system in China. The APAC division also expanded it's client and market reach beyond the traditional leasing market into the Pakistan market.

For example, we successfully implemented the motor transport management information system or MTMIS, a major E-government infrastructure project in Lahore, Pakistan, and now we are contracted to bring an additional 28 districts live under the system by the end of calendar year 2007. We expect strong growth in the public sector in Pakistan due to increased E-government spending, especially as we are one of the leading bidders for multi-million dollar projects.

One of these projects is the potential $300 million land records system for the province of Punjab Project, which will receive significant funding from the World Bank. Looking ahead, the APAC division's sales pipeline for LeaseSoft remains quite promising. We expect the present growth pattern in this division to continue for the next several quarters, as we capitalize on our leadership position in the IT sector of Pakistan.

Moving on to the Europe, India region, which is the Europe and Middle Eastern region, this division also posted very strong results for the second quarter, driven by increased service revenues from existing clients who continue to embark on new phases of development. The demand remains particularly strong for web-based front end and middle office solutions. Their clients are seeking more comprehensive business automation throughout the finance processing life cycle.

During the second quarter the India completed several major client projects on-time and on-budget, including a significant project with Investec Asset Finance, a global specialist banking group, that provides a diverse range of financial products and services throughout the U.K., South Africa, and Australia. The India division also successfully introduced new products into the market, to support front end and middle office operations of leasing companies, providing end-to-end contract management.

These new products include LeaseSoft Evolve, for which we recorded our first sale to Broker Kennet Equipment Finance, who is using the product to manage its own book portfolio. The LeaseSoft Evolve target market is U.K. customers with smaller equipment leading portfolios, in the range of 250 to 2,500 contracts. Another new product that was introduced in the India market was our LeaseSoft portal, with uses Microsoft leading edge dot net technology. Initial demand is very good, especially for new front end and middle office projects.

Looking ahead we expect the India division to continue to expand its market and product reach for mid market solutions beyond traditional independent leasing businesses. The division's services sales pipeline remains strong heading into the third quarter, and it is seeing strong demand across Europe, with the replacement of multi-lingual, and multi-country back office systems. We believe that the India division is well-positioned to take advantage of many of these opportunities, perhaps particularly as it leverages its partnerships with some of Europe's leading systems integrators.

Lastly due to the second quarter the North American division, our new division, had several significant highlights. First, it delivered the latest version of our flagship E-group in leading accounting and portfolio management system, LeasePak 6.0. This new release offers significantly improved usability, and modernization of the user interface, and state-of-the-art tools to streamline contract originations and collections.

LeasePak 6.0 also offers new optional add-on modules that should generate incremental revenues, as well as bring improved competitive position in our sector. I am very pleased to say that this latest version of LeasePak the largest and most comprehensive release of the product to-date has already received excellent reviews from the LeasePak users community, in the U.S. especially.

Second the North American division generated increased interest among customer prospects of all sizes, primarily through successful trade show participation and effective advertising and marketing initiatives. The division also achieved impressive results through search engine optimization. As a result, the North American division sales pipeline is improving.

To leverage this progress, the division is increasing its key sales resources. In addition, it is rolling out the NetSol IT services line of business in the U.S. commercial finance technology sector. We think this late opportunity could represent a major growth area for the company in the future.

Finally, the integration of McCue Systems into NetSol Technologies is on-track and progressing well. We are making a significant investment in terms of new resources, training and development, in order to create a very strong platform in the North American market. As a result by the end of this fiscal year, we expect that NetSol's offshore sources will more than 50% of the North America divisions development efforts. During the second quarter NetSol improved it's resource utilization, by integrating it's existing sales force for the North America divisions client consulting services group of business analysts and business process consultants.

In addition, we also enhanced the sales effectiveness of the division by supporting the North American sales force with resources from the North, or from the NetSol customer support area. Looking ahead, we expect the integration of McCue Systems into the NetSol will accelerate. We believe that our combined resources and capabilities position us well to further penetrate and succeed in the North American market. Therefore we believe the outlook for this division is quiet promising.

NetSol management strongly believes that to be a successful global player in our market, the business must grow both organically and through strategic acquisitions. I believe the results we have presented to you today demonstrate that we are delivering on this strategy. Our core business is growing at a strong rate, and we are expending our markets and customer reach. We are successfully integrating acquired businesses, and leveraging our resources and capabilities. In less than two years, NetSol has expanded its business to include divisions in three of the most strategic markets, the U.S., U.K., and Asia Pacific.

Moreover, our investments in China, the most booming market, are starting to reap rewards. In fact I believe China has the potential to become NetSol's largest single market. Our ability to execute on the growth strategy, as well as a strong pipeline of opportunities heading into the second half of the year, forces me to believe that NetSol is well-positioned to capture significant opportunities in the marketplace, and to post strong top line results for the remainer of this fiscal year.

I would now like to turn the call over to Tina Gilger to review our second quarter financial results. Go ahead, Tina.

Thank you Najeeb. Hello everyone. Thank you for joining us this afternoon on the conference call. Revenues for the second quarter rose 60% to $7.2 million, compared to $4.5 million reported for the second quarter of fiscal year 2006. Total cost of sales was $3.6 million, compared to $2 million reported in the same period of last fiscal year.

Gross profit for the second quarter was $3.6 million, or 50%, compared to 2.5 million, or 56% reported in the second quarter of fiscal year 2006. Our gross margin this quarter was less than historical levels, due to the added costs associated with the integration of the two recent acquisitions, CQ and McCue Systems. We expect to see improvement in gross margins, as we migrate more development work from the U.K. and U.S. offices, to our development facility in Lehore, Pakistan.

During the second quarter, NetSol continued to invest in its future as the cost of sales and operating expense line items demonstrate. These line items also show that NetSol is managing its costs carefully, as the increase in these expenses as a percent of sales is quite moderate, relative to the comparable figures from last year, which do not include McCue Systems. In fact, total operating expenses as a percent of sales were better in the second quarter this year than in the same period last fiscal year.

Total operating expenses in the second quarter were $3.3 million, or 45% of sales, compared to $2.3 million, or 50% of sales reported in the second quarter of fiscal 2006. Our strong sales growth and effective cost management enabled operating income to improve by 36% to $375,000, compared to $275,000 reported in the second quarter of last year. NetSol reported a net loss of approximately $4.6 million, or a loss of $0.27 per basic and diluted share for the second quarter of fiscal year 2007. This loss was due primarily to a one-time non-cash charge of $4.3 million relating to the financing for the acquisition of McCue Systems in June of 2006.

In addition, our bottom line was impacted by the minority interest in several of our subsidiaries, as the aggregated net income attributable to the minority owners, must be deducted from Netsol's earnings. Excluding the one-time charge, EBITDA, which is earnings before interest, taxes, depreciation and amortization, was $527,000, or $0.03 per basic and diluted share. The proforma net loss for the second quarter excluding the one-time charge, would have been $375,000, or a loss of $0.02 per basic and diluted share.

NetSol's management is committed to improving bottom line profitability going forward, and believes the Company can achieve quarterly breakeven or slight profitability as of this third quarter. NetSol ended the second quarter of fiscal 2007 with approximately $2.7 million in cash and cash equivalents.

I would now like to turn the call back over to Najeeb for some closing remarks. Najeeb?

Thank you, Tina. In closing, I would like to point out that historically NetSol posted strong results in the second half of the fiscal year, and we believe that that trend will continue this year as well. The positive reception we are receiving from customers worldwide for our dynamic commercial finance products, particularly in the Asia/Pacific and European regions, as well as our solid sales pipeline, make us very excited about the opportunities for the remainder of fiscal year 2007. Therefore, we continue to believe we can deliver revenues of approximately $30 million and improve profitability in fiscal year 2007.

Before we open the call to your questions, I would like to take this opportunity to thank NetSol's employees worldwide for their hard work and dedication to the Company. They are responsible for our success. Furthermore, I would like to thank our shareholders for believing in our Company. We believe the best is yet to come.

Operator?

[OPERATOR INSTRUCTIONS] Our first question from the line of Matthew Weiss.

Hello, how are you? A quick question, do you have the organic growth rate for the quarter?

Organic growth rate for the quarter, I believe was --

40 or 45%.

Organic, no, it wasn't quite that high. It was about 30%.

30%?

Yes.

What was McCue's precise contribution during the quarter?

McCue's precise was, for the quarter, [1.45] million.

1.45. Okay. What did they contribute to EBITDA?

That, I don't have that broken down.

We can do it off-line, Matthew.

That's okay. That's no problem. Then sort of as I look at the revenue mix going forward, at least relative to my expectations, the license revenue came in pretty strong. Going forward, do you see that as sort of a base and to steadily trend upward, and account for upwards of 40% of revenue, and where do you see the maintenance and services mix going forward, steady sequential increases?

Yes. Matthew, as you have seen the last two quarters, especially Q2 we have shown pretty robust growth in the license sales, especially in China. We believe the third and fourth quarter will be pretty strong, the pipeline and near closing of some of the key products we've been working on, I think license sales and the maintenance will constitute the biggest growth yet ever.

Based on the guidance we have given you, we have about 70 million to achieve in the second half. I think 60% of that is coming from license sales, and service and maintenance, and the balance is coming from the local E-government and infrastructure project in Pakistan, and of course, the contribution from U.S. and U.K. companies.

Great. And then can you go back and tell me was said your expectations were for profitability in the back half of the year? You had mentioned something about being slightly profitable.

We expect to be either breakeven or profitable beginning with Q3 for the quarter.

So is it fair to say that for the two quarters combined in the back half of the year, that you would expect to be better than break even or--? I'm trying to get a better handle because you updated the topline guidance.

We have done the model, between me and Tina, I think second quarter on standard business it looks like it will be profitable. Obviously we don't have any more non-cash items in reference to the financing. It's all behind us as you know. So we should be in much better shape on a net profit basis.

So from here on out pro forma EPS should be mirroring whatever your EPS figures are?

Yes.

Quick question on this contract you just announced in China the other day about the $1.5 million contract, what did that hit this quarter and what's the revenue recognition around that?

Basically we started working on that contract, literally at the end of the first quarter which was the September quarter, and we have already delivered the system pretty quickly, because as you know, a LeaseSoft license you don't need to do anything other than take the whole system and with the team of project management, to install and provide them the services. Going forward, as I mentioned the pipeline is very strong, and especially in the China market, which is going to be potentially our biggest market for the LeaseSoft, and our end-to-end solutions.

Great. Just a couple quick more, and I will throw it out to another individual. Do you think that your CMMI Level 5 accreditation has opened up additional opportunities for you, can you cite specific instances where you may be invited to compete on a deal where you otherwise wouldn't have been?

Absolutely. I mean CMMI Level 5 is the biggest quality standard, the gold standard in our business. If you go back about a year now, the contract from Toyota and a few other names that I am not allowed to give names, we've been giving anonymous announcements, but these big companies and even the projects in the local government sector has given us really a tremendous profile, and so to speak, credibility in this business.

It has definitely helped us, and I think we are the only company in that emerging market, from on whole, where we have all of the developers and programmers placed. Secondly, you will not find any other company I believe from that region, which has achieved this kind of all new product portfolio, but also a quality standard which is really second to none, so we are really getting a lot of advantage with that, and it's showing in our revenue growth.

Next question, please?

Your next question comes from the line of Debra Fiakas.

Good afternoon. I wondered if you could tell us what cash flow from operations were for the first half of the year?

Can you speak louder, I can barely here you please.

Cash flow from operations for the first half of the year?

Yes, cash flow from operations, because we had the payment for the acquisition for McCue, we used like $5.6 million, and $4 million of that was for the acquisition.

Excellent. Also just to clarify the previous question in regard to the China contract, did you mean to say that revenue from that contract has already been booked in the second quarter?

Not all of it. As you know, this has been three months out since we started the project in China, and as the project will complete I believe in about two months, I don't know the exact date of completion, but as I said in my presentation, Debra, we have a pretty strong pipeline in the China market especially, which is really healthy for us, and we believe that there's quite a few other new contracts to follow.

So it was already booked in the first quarter?

I would say 75% of that, yes.

Okay. And then I also was hoping to get a better grasp of the two products that you were just mentioning earlier in your prepared remarks, the LeaseSoft Evolve and the LeaseSoft portal. Are these being marketed as standalone products, or as simply add-ons for existing customers?

They are marketed standalone, but really we are going after 55, 60, potentially customers that we have through the U.K. CQ acquisition, and you have seen pretty strong response as I said in earlier remarks, that is what you call Evolve, the other one is really the NetSol LeaseSoft portal, which basically allows the [borders], the partners, and vendors like to achieve integration with the [thunder] systems. And that is something we have seen some response and is rather new in the U.K. market.

And then one final question, and this again goes back to your prepared remarks, you were talking about the consulting and development opportunities for E-government in Pakistan, and you mentioned the Punjab system. It sounds like it's a fairly sizeable system. Would you anticipate that there would be more than one provider that you might be working along with other service providers, or other consultants on that project?

Yes, it is indeed, Debra, our mega project, funded by the World Bank. There are two them in different sectors, one has to do with land recording, which is a new thing in Pakistan, and we are in a prime position. In fact we have been bidding and we've got one project in a smaller district of [Pasha inaudible]. I think the size is quite big.

We are partnered with a local competitor, so combined with NetSol, and we have not announced a name yet, we have become I believe, the dominant bidder in this process, So the outlook is pretty strong. We believe that in this second half you will see some major development on this front, both from E-government and, of course, the land record.

Excellent. Thank you.

Thank you, Debra.

Your next question comes from the line of Bill [Garrison].

Good afternoon. Wondered if you could expand at all, in terms of the additional cost of integration, as it affected your gross margin?

Yes. Thank you, Bill, for asking the question. You know, we completed the McCue acquisition around the first of July, about six months ago.

Initially we had expected to train maybe five programmers, but now just three months ago we agreed to train 15 programmers. The reason being is that the cost is significantly high in the Silicon Valley, where the company is based, this is a fast track cost increase, but also we wanted to move 50% of the development to Lahore. Combined with management integration, combined with hiring some more people, sales and marketing personnel although that didn't affect our gross margin, so as the direct cost has increased, it is a temporary thing, there is some overlap.

As we have developed these new programmers in Lahore, then they will be able to take a lot of workload from the current project management at a much lower cost. I think you will see the second half, especially the third to fourth quarter, an improvement in the gross margin.

Would you be able to attach a number at all?

We were hoping, Bill, we were hoping in the second half to achieve 55%, or maybe north of 55%, potentially, we did 50% I believe in the first half, if we achieve 55% in the second half that would mean going to about 53% for the year. And historically if you have followed the Company before these acquisitions, our gross margin was near 60%, or 55% sometimes, but now because we have combined two new acquisitions in the U.K., and the U.S., these are all high cost locations as you can imagine.

So as we integrate them effectively and efficiently you will see the reduction of pretty much the level we were before two years ago perhaps in about year's time. The effort is really through how fast we can train this personnel, and take a lot of development to Lahore.

Thank you. Secondly, I wanted to see if you could, or just to clarify, I think you answered earlier that the North American revenue, was it 1.045 million?

Yes. Any time you make an acquisition, there is a lot of distraction with both managements, you are going through a lot of cultural management, movement, integration of products, customers. You know, I went over and helped my team in McCue. They needed time to really go through this change and mindset. So we are going through that.

We are also hiring new salespeople. We have already done that the last 30 days, and I believe now be aggressively ready to not only bring some NetSol IT services in the U.S. market, but also with the help we are providing, both in the back end and the front end of the marketing we believe the sales will come back as we originally planned to, but this drop was expected in the initial phase of integration, but I am pretty confident in the second half of this year and the first half of the fiscal year '08, we will see a much stronger company in the U.S.

Lastly would you been able to share what revenue from your U.K. operation was during the quarter?

Yes. We closed about 1.6 million, I believe, roughly. And a slight improvement from the previous year. That's about 6 million, or 6.5 million run rate for the U.K.

I guess, again, I could wait for the Q. but I guess --

The Q will have all the specifics of what each of our subsidiaries did for the quarter and for the year, as well as by continent.

I guess I am still off trying to come up to the 7.2 million.

You will see the numbers are really broken down by continent, and even by the product groups, right, Tina?

We have got it broken down in the MD&A section by subsidiary, and by region, and the percent that they contributed to the revenues. So that is in the Q.

Very good. Thank you and good luck.

Thank you, Bill. Next question, please.

Your next question comes from the line of Matthew Weiss.

Hey, guys, another quick one, two things, actually. One, what, I am trying to get a better handle of the visibility you have of your pipeline. I know that the sales cycles are typically long, but can you refresh my memory, what are the renewal rates on your maintenance contracts?

About 25 to 30%.

What sort of visibility does your pipeline offer you into future revenues, say, three, six months out?

We are pretty confident, Matthew, for the next two quarters. I think especially Asia Pacific, and more especially the Chinese market. We believe that the number we have given, we are pretty solid about the potential of closing, and meeting these targets. The majority of the license sales in the LeaseSoft, and quite frankly Pakistan offers tremendous new revenue opportunities.

We did quite well actually in the last, you will see the breakdown in the 10-Q. We have done some services [at this point], but now as I mentioned, there are two different major sectors, that we believe that will close, if not both at least one of them that could be a sizeable contract.

Okay. And then would you say, I think you gave me what you get as a percentage of the license contract for maintenance. I was asking for the renewal rate?

The renewal rate is pretty high.

Always 100%, we have never, quite frankly if you are referring to customers like, the blue-chip customer like Toyota, DaimlerChrysler, unless they decide to change their technology, or their hardware, we have no problem, we have never lost a customer in the renewal lease. Ten years ago, with the first contract in Thailand, we are still getting each year 25, 30%. We are pretty comfortable with that. That's why we have these blue-chip customers who need our system.

Pretty much the renewal rate is very high because of renewed maintenance if they keep the system.

Got you. Thank you, guys.

Once again, [OPERATOR INSTRUCTIONS] There are no questions at this time.

Thank you. Thank you again for joining us on the call today. Our comments here today demonstrate these are exciting times for NetSol. We believe we are poised for strong growth in the second half of this year, and we look forward to talking with you again next quarter, to provide an update on our progress. Thank you again, and have a good day.

This concludes today's NetSol Technologies second quarter fiscal year 2007 financial results conference call. At this time, you may disconnect.