NetSol Technologies Inc (NTWK) 2008 Q2 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the NetSol Technologies, Incorporated Second Quarter Fiscal Year 2008 Financial Results Conference Call. (OPERATOR INSTRUCTIONS)

It is now my pleasure to introduce your host, Mr. Christopher Chu, Global Consulting Group for NetSol Technologies, Inc. Thank you, Mr. Chu, you may begin.

Thank you, operator.

Hello, everyone, and thank you for joining us on the NetSol Technologies, Inc. Second Quarter Fiscal Year 2008 Financial Results Call for the period ended December 31st, 2007.

Please note, we have prepared a PowerPoint presentation to accompany the call. The document may be found on the main page of the Investor Relations section of the NetSol website -- www.netsoltek.com. That's netsoltek -- T-E-K, all one word -- .com.

In addition, I would like to remind you that we are webcasting today's call. The webcast archive of the call will also be available in the Investor Relations website of NetSol.

Before we begin, please proceed to slide number two, as I read a brief Safe Harbor statement. This Conference Call may contain forward-looking statements. These statements reflect the current believe 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 and actual future results and developments could differ materially from those set forth in the statements due to various factors.

These factors include, among others, changes in the general economic and competitive situation, particularly in NetSol's business and markets. In addition, future results and developments could be affected by the performance of financial markets, fluctuations in exchange rates and changes in national and super-national law, particularly with regard to tax regulations. The Company assumes no obligations to update forward-looking statements.

Moving to slide number three -- during today's call, Mr. Najeeb Ghauri, Chairman and Chief Executive Officer, will share an overview of the business and financial results for the quarter of fiscal 2007. He then will hand the call over to Tina Gilger, NetSol's Chief Financial Officer, to review more specific details of the financial results. We are also pleased to have Mr. Naeem Ghauri, President of NetSol Technologies Europe and Products, join us on the phone today. Najeeb, Tina and Naeem will be available for a Q&A after the prepared remarks.

I would now like to pass the call over to Mr. Najeeb Ghauri. Please go ahead.

Thank you, Chris. Well, everyone, and thank you for joining us today.

I hope you found a PowerPoint presentation we prepared to supplement this call and we'll follow along with us. The slide numbers we refer to are found at the bottom of each slide.

As the press release issued today, and as slide number four demonstrates, that's all delivered positive progress on all its key financial performance metrics. On the top line, second-quarter revenue decreased 16% year-over-year to $8.4 million, with our core enterprise software and IT outsourcing businesses continuing to be the largest driver of revenues.

Six-month and year to date. Revenue for the first half rose 30% year-on-year to $17.1 million, putting us well on track towards achieving our stated full-year guidance for organic revenue growth of between 25 to 30%. Gross margin for the quarter was 57%. It held the improvement from 50% in the prior year.

We also continue to honor profitability goals, with NetSol now having been GAAP-profitable on a quarterly basis for the third consecutive quarter. Fiscal second quarter operating income rose an impressive 284% to $1.4 million, and GAAP net income increased to $1.1 million, or $0.04 per diluted share, as compared to a GAAP loss of $4.6 million, or a loss of $0.32 per diluted share a year ago.

EBITDA increased to $2 million as opposed to negative EBITDA of $3.7 million in the comparable quarter a year ago.

Our CFO, Tina, will provide a more detailed walk-through of our fiscal second quarter financial results later in the call. But before I begin, the operational review, I wanted to provide everyone a brief update. With regards to the extraordinary geopolitical events that occurred in Pakistan last quarter, in order to provide increased clarity on our business.

Despite the events that unfolded in Pakistan, there has been no material disruption to our Development Technology Campus or our day-to-day operations, aside from four days of national mourning which were non-billable days for our IT services team in the whole of Pakistan.

In aggregate, we delivered our services unhindered. The one area we did see some impact related to the lengthening of the sales cycle for some new business activities specific to the Pakistan market, particularly in the government vertical. We are continually monitoring the local market their and are optimistic that as the elections moved successfully forward, the government can return to a normal operating environment, and possibly accelerate those decisions' time lines.

With that being said, we remain comfortable with our guidance. And our business has increasingly become a more global one in terms of global new business development, global execution and global servicing.

As such, we have increased liability to resources across our global development centers in North America, Europe and Asia-Pacific. This is a key part of our strategy of diversifying our global development centers in strategic geographic locations.

NetSol's committed to expanding its development capabilities in the most strategic, growing and emerging markets. Having staff local to the client as well as supported by high-value IT services; and software development staff in low cost geographies is central to our focus of BestShoring.

You will hear me use the "BestShoring" term often going forward, as I believe it best communicates our strategy and our ability to service customers in a way that best serves their specific needs. As such, NetSol has efficiently enhanced its BestShoring capabilities in our location in San Francisco, [Holshum], UK; Sydney, Australia; and Bangkok; thus mitigating any risk in an offshore location.

We continue to see good demand for specialized outsourcing opportunities as customers see the long-term value proposition our Best Shoring model brings, even as the global economic environment, shows signs of concern around the U.S. economy. This, combined with our strong presence in the Asia-Pacific and European markets, provides enhanced balance to our business model.

Overall, I think the best measure of our performance is our financial performance metrics. And as I highlighted moments ago, NetSol continued to deliver solid performance across all its key benchmarks.

Now let's review the operational details behind our fiscal second-quarter performance. Please turn to slide number five.

Here we take a look at some of the major highlights that our NetSol Asia-Pacific business delivered. Our LeaseSoft product won the Asia-Pacific ICT Alliance award for Best Financial Industry Application for 2006 [sic -- see presentation]. APICTA is one of the largest information and communication technology associations in the Asia-Pacific region, with 20 member countries.

From a pool of 50 nominees, [LeaseSoft] was declared the winner by an international panel of judges. The [honorary] from LeaseSoft is the product of choice for the leasing and finance industry across Asia-Pacific region.

As for new [licenses], LeaseSoft is increasingly on the rise. The current pipeline posts over 20-plus captive auto manufacturers and non-captives globally at advanced stages of discussion.

NetSol continues to be the leading IT exporter in the whole of Pakistan. Once again, NetSol was also awarded the best export performance award for 2006-2007 for the highest export of IT services from Pakistan. We received the distinguished award from the Federation of Pakistan Chamber of Commerce and Industry.

We were also able to grow our company horizontally, adding a hospital management systems capability is a new market [provider] tool to our Center's expertise. Our APAC division one and new contract to design and implement an IT system for a major public hospital. This opportunity for NetSol represents a significant new business sector for the company to address, focusing on the development and implementation of hospital management systems.

NetSol-TiG is a joint venture with the innovation group, focused on outsourcing services for the insurance market, and working together with TiG's insurance clients, so we continue to get exposure to potential new business opportunities to help drive our pipeline going forward.

NetSol-TiG continues to grow, contributing almost 11%, to our total revenues are the quarter. This is up from 8% a year ago. However, there were a few billable days lost due to extraordinary events that resulted in national holidays in Pakistan.

Reflecting the increasingly international breadth of our business, I would also mention briefly that negotiation between [began] in this quarter for the Saudi Arabian contract, which we recently announced, and marks our first significant LeaseSoft contract in the Middle East. We expect revenue from this quarter -- from this (inaudible) deals to begin to recognize in the second half of the current fiscal year. And it is particularly important to note that our [flexive] LeaseSoft solution is sought after in this new market for us.

Now on to NetSol EMEA division -- let's go to slide number six. We have made much away. With regards to integrating and optimizing our UK and [European] presence with our North American offices. Our continued effort to leverage the strength of an integrated development infrastructure support our long-term strategy of building low-cost development resources whose local counterparts interface with customers directly by also mitigating our development exposure. In any [on-market].

With the successful realignment of the sales and management team in place, the EMEA division now includes our new business development director, new sales and marketing director, new director of operations; as well as key additions to the sales force. The EMEA division has a strong foundation in place and is dedicating significant resources to its pipeline development across the UK and European region.

Operationally, a framework agreement has been established between EMEA and APAC. The agreement sets out the commercial and operational approach to joint ventures such as auto finance implementations, where product delivery is provided by [law], and EMEA sales team handles the direct customer interface.

With this framework in place, a new initiative has been launched to offer auto finance products in Europe. We're aggressively pushing sales -- pursuing sales leads in the region to bring forward potential revenue opportunities with identified targets.

Also in the quarter, we announced a new marketing partnership in Greece. The marketing partnership in Greece is with a leading Greek IT provider and strengthens our presence in my European IT services and enterprise solution market. The strategic partnership is with Real Consulting Information Systems (inaudible) in Greece.

They are an IT consulting and integrated services firm providing integration solutions in the field of ERP solutions, system integration, and turnkey IT solutions for the private and public sectors in Greece and the adjacent regions. Under the terms of the completed frame agreement, the Real Consulting SA will partner with NetSol in introducing NetSol IT Services and enterprise solution to the Greek and adjacent markets.

Moving forward -- we are already outlining plans for the next fiscal year with the view of increasing both top and bottom line, by laying down a long-term infrastructure to achieve profitable growth.

Turning to slide number nine, North America -- we see that NetSol continues to receive highly visible recognition in terms of awards and accolades. Most notably, NetSol was included, for the first time this year, in Software Magazine's Software 500, ranking with the world's largest software end service providers, now in its 25th year. NetSol joins the Software 500 list for the first time this year, with the rank of 340 worldwide.

The Software 500 is the revenue-based ranking of the world's largest software and services suppliers, targeting medium to large enterprises -- the IT professionals, software developers and business managers involved in software end services purchasing.

We were also named to Deloitte and Touche's prestigious Technology Fast 50 Program for Los Angeles, California, a ranking of the 50 fast-growing technology media, telecommunications and licenses companies in the area. The rankings were based on the percentage revenue growth over the past trending five years from 2002 to 2006.

We continue to hone our North America division. And this quarter, we restructured and reorganized the North America operation by replacing the President, John McCue, with Mitch Van Wye, the Chief Operating Officer. In addition, we had a few other management changes to positions in North American market for LeaseSoft launch and IT Services rollout.

From the new [group, the health service] and garner revenues from large clients in the region, we also invested significant sources, adding network infrastructure, new connectivity; and replacing capital equipment. We also completed the final marketing support for our brand transition from NetSol McCue to NetSol Technologies North America.

As part of this re-branding process, we participated in the [group and lease] and Finance Association annual meeting, where we aggressively marketed NetSol North America's new offshore outsourcing capabilities, and have since seen several potential opportunities evolve from the event.

During the quarter [tax] Corporation and a Fortune 50 IT provider went live with the NetSol LeasePak solutions. We also supported the sale and upgrade of new versions of LeasePak 6.0 for five existent clients.

At this point in today's discussion, I would like to turn the call over to Tina, our CFO, for a detailed review of our financial goals and a recap of our forward-looking guidance. Tina?

Thank you, Najeeb. Good morning, ladies and gentlemen. Thank you for joining us on today's Conference Call.

I'll start today's financial review with a look at slide number nine. Here we see NetSol's top-line revenue growth over the last five years, reflecting an impressive compound annual growth rate of 68%, as demand for our portfolio of products and services continues to grow. With six-months year-to-date revenue of $17.1 million, up 30% over the prior-year period, we are currently on track to achieve the high end of our full year 2008 organic revenue growth range of 25 to 30%.

While there is still a full six months of reporting to go, we are quite happy with where our forward global new business pipeline stands, particularly as we enter what is historically, the stronger half of our fiscal year.

Overall, at this time, we are quite positive regarding our prospects for the second half of fiscal 2008.

Turning to slide number 10 -- we take a look at the major components of revenue for the second quarter fiscal 2008 as compared to the year-ago period. NetSol's top line for the quarter grew 16% year-over-year, driven by solid growth in license and maintenance fees, as well as an especially strong 29% year-over-year growth in IT services.

Slide number 11 shows the breakdown of revenues by business. For the second quarter as a percentage of total revenue, IT Consulting and Services represented 48%. License fees represented 34%, and maintenance fees were 18%.

On a geographic basis -- for the second quarter as a percentage of total revenue, Asia-Pacific represented 67%, North America represented 14% in Europe represented 19%.

On slide number 12, we see NetSol's historical quarterly acceleration in top-line revenues culminating with the $8.4 million generated in the most recent quarter.

Moving to slide number 13 -- we look at NetSol's gross margin performance over time. NetSol achieved gross margins of 57% in the second quarter, up from 50% in the same period a year ago. The gross profit margin is expected to continue to improve as NetSol's operation in the UK and U.S. are now fully integrated, and cost savings are being realized.

Our goal is to achieve, on a quarterly basis, gross margin with the high 50 to 60% range, and we believe that we may ultimately, over the long term, be able to reach gross margins of 65% as we grow the Business and begin to operate at or near full capacity. Gross margin for the first half also improved and hit 59% in the period, as compared to 50% for the first half of fiscal 2007.

Slide number 14 shows the breakdown of operating expenses for the second quarter of fiscal 2008 as compared to the year ago period. Our success in controlling -- and in many areas reducing -- operating expenses has been excellent.

As you can see from the table, total operating expenses increased to a modest 3% from the prior year period. The operating expense efficiency is even more evident when we look at total operating expenses as a percentage of total revenue. On net basis, the current-period expenses were just 40%, compared to 45% in the same period last year.

Expenses related to sales and marketing increased by approximately $300,000 in the current year, as we continued to invest in strengthening our global sales force with high quality additions. This investment is a critical part of our organic growth, and we continue to see strong lead generation from our expanding sales force as a direct result. Another encouraging sign -- we are also seeing a positive increase in the average deal size, as we've bid on larger and more sophisticated customer engagements.

Operating expenses for the first six months came to $6.4 million, in line with the prior period. As a percentage of revenue, however, the current first half was 12% lower, at 37% compared to 49%.

I would point out that due to the management realignment activities at NetSol North America and NetSol EMEA, we recorded approximately $100,000 in severance expense in the second quarter of fiscal 2008 and expect to incur approximately $200,000 in additional severance expense in the second half.

As we move into the second half of our fiscal year, there are some areas we will be increasing expenses in order to further strengthen our financial reporting structure and corporate governance practices, both to the benefit of our shareholders. We have begun implementation of SOX 404 internal controls compliance, and we have retained KPMG to provide consulting services for this project on a global basis. Going forward, our goal is to continue to use the operating leverage inherent in our organization to drive increased levels of GAAP profitability.

Moving on to slide 15, and a look at GAAP EPS -- [my] second-quarter remarks that souls are consecutive quarter of GAAP profitability. NetSol's GAAP net income increased to $1.1 million, or $0.04 per basic and diluted share, versus a GAAP net loss of $4.6 million and a loss of $0.33 and $0.32 per basic and diluted share respectively a year ago. Please note that in fiscal 2007, NetSol recorded a non-cash charge related to the acquisition of McCue systems in North America totaling $4.3 million.

Our net income performance is even more impressive when you take into account several factors that provided headwinds in the quarter. These factors included -- initiatives in severance expenses, focused on realigning our management structure in the U.S. and UK, and a significant reduction in the number of billing days during the quarter. For our largest business unit due to holidays, and the extraordinary events in Pakistan during the period. The number of billing days for NetSol [PK] during the current second quarter was 58 days, compared to 65 days in the prior-year quarter.

For the first six months of fiscal 2008, NetSol GAAP net income was $2.9 million, or $0.12 per basic and $0.11 per diluted share. This compares to NetSol recording a GAAP net loss of $5.9 million, or a loss of $0.34 per basic and diluted share for the first half of fiscal 2007.

Minority interest income deducted was $383,000 and $658,000 respectively for the second quarter and first half of fiscal 2008.

Slide number 16 illustrates NetSol's EBITDA performance on a quarterly basis over time. And as you can see, NetSol posted strong quarterly EBITDA results this quarter.

Even God is defined as earnings before interest, taxes, depreciation and amortization. The Company uses EBITDA as the measure of the Company's operating trends. Investors are cautioned that EBITDA is not a measure of look what he or of financial performance under generally accepted accounting principles. The EBITDA numbers presented may not be comparable to similarly titled measures reported by other companies.

EBITDA, while providing useful information, should not be considered in isolation or as an alternative to net income or cash flows, as determined under GAAP. We believe EBITDA is one of the best metrics to measure the underlying profitability of our business.

EBITDA for the second quarter was $2 million, or $0.08 per basic share and $0.07 per diluted share, compared to negative EBITDA of $3.7 million in the second quarter of fiscal year 2007.

Please note again the impact of the non-cash charge related to the acquisition of McCue systems totaling $4.3 million in the year-ago period.

EBITDA for the first six months of fiscal year 2008 was approximately $4.8 million, or $0.21 per basic and $0.18 per diluted share. Year-to-date, our EBITDA margin as a percentage of total revenue reached an impressive 28%.

Looking now to slide number 17 -- we see selected highlights from NetSol's consolidated balance sheet for the second quarter.

That's all ended the second quarter of fiscal 2008, with approximately $8.5 million in cash and cash equivalents, up from approximately $2.7 million in the year ago period.

I would like to highlight here -- the cash generated this quarter with cash flows from operations, topped $2.6 million. This was driven by several factors, including strong revenue generation, increased operating cost inefficiencies and improved Accounts Receivable collections.

As you can see from the slide, our accounts receivable balance. Actually declined 62% year-over-year, to $7.8 million. Revenues in excess of billings, was $10.3 million. Revenues in excess of billings represents revenues earned and recognized by the company under U.S. GAAP. Above what has been billed to the customer under the terms of the contract. For more details, you can refer to our consolidated cash flow earnings press release and in the Form 10-K [SBs] we will file with the SEC.

Moving to slide number 18 -- based on the strength of NetSol's first-half results, including 30% top-line growth and 57% gross margins, and our third consecutive quarter of GAAP profitability, we are reiterating our fiscal year 2008 financial guidance for the year ended June 30th, 2008. We continue to forecast, organic annual revenue growth of 25 to 30%.

Our quarterly gross margin target remains between the high 50 to 60% range. Our forecast for fiscal year 2008 diluted earnings per-share is between $0.28 and $0.32.

And finally, we are focused on sustaining and expanding NetSol's U.S. GAAP profitability on a quarterly basis. Based on our success in meeting these subjective at the mid-year mark, and the fact that the second half of the fiscal year has his dork we been stronger than the first half, we stand optimistic in our outlook for the remainder of the year.

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

Thank you, Tina.

NetSol has made great strides in becoming a global leader in IT solutions services, offshore and outsourcing. I believe that operational streamlining and restructuring efforts implemented this quarter were essential for NetSol to continue to strengthen our internal management and organizational structure and support our long, strong growth trajectory moving forward.

Today, we stand as a stronger, more efficient and effective force in the market for global IT services and software.

As always, I would like to thank our team of dedicated NetSol employees worldwide for their dedication and contributions to grow this business together.

With that, I'd now like the call to the operator to facilitate the question-answer session. Operator, please take the first question.

(OPERATOR INSTRUCTIONS) Matthew Weiss, with Maxim Group.

Hello, everybody. How are you?

Oh, hi. Fine, thank you.

Hello, Matthew.

Nice results in light of some of the [disogemous] events coming out of Pakistan.

I wanted to get a little more color on the guidance, the [effect] (inaudible) guidance. Obviously when you first provided your outlook, I think that you had discussed how it had reflected, at least partially, some of the headwind associated with some of the political turmoil coming out of that region.

I was wondering if, in the back half of the year, the fact that you're reiterating guidance -- doesn't factor in necessarily in their being improvements in the political aspect there? Or if things stay the same, or perhaps worsen -- which probably is not in all likelihood going to happen -- but is there a risk to the downside to your outlook?

Thank you, Matthew -- Najeeb.

The thing is, between our global business outlook -- when you look at the North America and UK, you've seen much stronger pipeline for the license sales. And Naeem will add in a second also some more comments. But in Pakistan, especially, as you know, we don't have too much reliance on the local revenue. We're working on some major projects. We believe after the election is over -- which is just a few days from now -- things should come normal, where we can move forward, trying to close their some major [projects]. But I'm quite confident, based on our visibility and on the pipeline, in how we can realize some of those projects which will achieve our guidance [there].

So I think Naeem can add some more comments if he'd like to.

Yes, Matthew. We see really, in Europe especially, a very strong pipeline, as opposed to the previous six months. And we will see better sales results in Europe in the second half. And I also have very good visibility in the U.S. of our new LeaseSoft business. So these two regions are going to perform for us a lot better in the second half. So there is less dependency in Pakistan.

And you suggested things -- they could deteriorate, but we don't see that happening, in light of the elections that are immanent in the next week or so. But we have very little dependency in revenue within Pakistan. A lot of the guidance is factoring in new business from Europe and U.S. and Asia Pacific.

Okay. That's helpful.

Just so I'm clear -- at least the numbers on working with -- would it be fair to say that over 90% of your revenues are generated outside of Pakistan?

Yes, absolutely. That is a fact, yes.

Okay.

And then, you talked a little bit about the sales cycles being elongated with some of the government initiatives. Could you give us a status update? I assume, perhaps, that the Land Records Management Contract is one of those that's been pushed out a little bit. Can you tell us where that stands?

Naeem, you want to handle that?

Yes, sure.

Matthew, the government sector at the moment is just slow. But we have seen no reduction whatsoever in the pipeline. Every single bid that we're in is still live. As you can imagine, in a country where there is a chain of government, the bureaucracy slows down. So we really expect that after the elections 18th of February, and once the new government takes oath and is business-as-usual, we'll start to see more movement and better momentum in that segment.

So we have -- apart from land records, we have several other projects in the defense and the government public-sector. So really are very optimistic that it will start to move.

Further, Matthew -- Najeeb here -- we have seen actually, since last three or four months, we have not lost any contract or any potential that we are trying to work on including the land accord. The grant is still intact, with $300 million from the World Bank. We are engaged into pilot projects for this particular initiative.

So, we are still on the front line as one of the top three or four candidates to win (inaudible) [award]. So basically, it's slow due to the situation in Pakistan, but we've not seen that -- this will happen. It's just a matter of time, really.

Okay.

And then I wanted to drill down a little further what's going on in the U.S. market here. Fourteen percent coming from North America would imply a contribution from a queue. Probably just a little bit over $1 million. That was pretty much at the run rate that you were at before. And now you -- what type of growth potential are you seeing out of that market? Obviously, you're making some changes there to try to stimulate growth in the region.

But maybe, some of the broader macro concerns that are present in the U.S., particularly around the financial services industry coming into play at all?

Yes.

Matthew, first of all, McCue is no more -- is now NetSol North America, and we re-branded it. Secondly, we have made a lot of changes in the management, which were important to position the company for a NetSol LeaseSoft rollout and IT services rollout in the U.S. markets.

We also believe that in the U.S. market, while it's a difficult time -- we all know that -- in the financial sector -- but we are the catalyst, providing solution effectively into the U.S. market, as we have further successes in the Asia-Pacific.

So we're pretty comfortable with the growth prospects here. We have positioned the company in last three months; already realigned the management with the culture and the product, and of course cross sell between three locations. And Naeem [is also active] with our team in the U.S.; I think he can add some more color.

But I'm really comfortable with the use of (inaudible) exactly why we brought in, Mr. Mitch Van Wye, who is the Chief Operating Officer, with 25 years experience in the Silicon Valley, along with some more new field executives with a new perspective.

So we're quite confident. And in [six months] you'll see much better performance from the North America.

Okay.

And then just a couple housekeeping items -- sales and marketing -- at least versus my expectations, and if you look at it percentile of revenue -- spiked up a bit here than aware of more accustomed to seeing usually; it's in the high single digits. We got almost 13% of sales here. Is that a number to use on a go-forward basis? Was there anything baked into that? I assume the severance costs were in G&A, so --that you talked about? Can you give me a little more color what's going on in the sales and marketing?

We have a very -- I think [$200,000] or $100,000 I believe, the last quarter severance charges. We have another $12,000 for this second half of '08.

And that's baked into sales and marketing, not G&A?

Yes, yes.

Okay.

Well --

Go ahead, Tina. Tina, go ahead.

Both, because some more marketing, and some were G&A people. So it will be in both.

And part of war were seeing in the growth of sales and marketing is more activity in our marketing --

Hello, Tina, there?

Yes -- marketing efforts -- was trying to find the right word, sorry -- and our marketing efforts.

So I think where were at on our sales and marketing is a good trend in growing ourselves.

Okay.

And then, just on the share count -- obviously that jumped a lot here, given some of the option exercises and whatnot. I think last call, you were planning to exit the year at about a $28 million to $30 million share ccount -- not dollar -- 28 million to 30 million-share count.

Right.

Does that still sound about right?

First of all, you've seen the total shares outstanding -- 25 million as of Q2. And we had seen quite a few [ones] at the size in Q2, along with the employees' options.

We believe by year end June 30 fiscal, we should be around maximum 26 million, 26.5 million. We have no plan for any more new shares issues at this stage. So whichever options or warrants through, they'll be part of the total shares outstanding.

And I think the fully diluted basis is going to be about 36 million altogether, between Lawrence and options in total on a diluted basis, so --

Okay.

I'll throw it out to the queue. Thanks so much.

Thank you. Thank you, Matt.

[Asim Tuana], a private investor.

Yes, good morning.

Good morning.

(inaudible) Yes.

My question is, that I understand that NetSol USA owns the majority shareholding in NetSol Pakistan. And you guys are also in the management here.

So, I see that NetSol has (inaudible) [planning] estimate mark in the U.S. Then yesterday, you announced a 20% bonus to the Pakistani shareholders of NetSol Pakistan. Would you like to explain that -- the reason?

Yes, sure. This is Najeeb.

There are many ways to look at it. One is, NetSol Pakistan -- which is majority owned by the parent company, which is NetSol Technologies, Inc. -- has improved its valuation.

If you look back, if you remember, the IPO price of rupees, 25 -- back in August was [around 5]. Now it's 200 x bonuses last three quarters here.

Secondly, we definitely want to maintain a trend. If you're making money -- we're making pretty good profit, as you know, in Pakistan. We'd like to attract bigger and bigger institutions to our shareholding. And you've seen that happen, if you look at the volume in last few days; it has really gone into millions.

The reason is because we are more afloat, and improved our market valuation and improved our ownership valuation for the parent. So this ownership, parent at the time for IPO was about $50 million; now it's about $75 million for the parent.

So in any way, it's a win-win for the U.S. shareholders. They still maintain the same ownership. We believe issuing bonus is more like a norm in Pakistan, the capital market. And the shareholders tend to hold their position longer. And it strengthen our position in many, many ways. So, I believe this is a win-win.

Now we have about, what, 50% more shares of parent as opposed to when we had then the IPO back in 2005. So I see it's a win-win for every shareholder across the globe.

Naeem, you want to add any color to that?

Yes. Yes, [it's Naeem].

Other thing is that the stock price in rupees is quite high. It's in three numbers -- three digits. So really, it's almost a split of shares. So it's called a bonus in Pakistan, but it's really a -- what you call a forward split.

Yes.

Really, we've done one for five, and because our stock price is that high. And it makes it more affordable. And so we have more recent interest, as well as institutional interest.

In the U.S., at the right time, if the stock is high enough, we could even offer a similar concept to a bonus, which is really essentially a forward split.

And this was an interesting position for NetSol. If you look back quickly, in last 12 months, (inaudible) come in [the addition] drops fundamental numbers performance -- but look at the valuations of parent now. We were selling at three times more valuation for the parent holding than we would [be worth today]. The more we issue bonus, it increases our float, increases shareholding by the institutions; but also improves our balance sheet, in terms of our ownership and how much it values right now.

So, I believe that is a good thing for the shareholders globally.

Yes.

My question again is that the shareholding structure in Pakistan that you said had been [predated] (inaudible), which is almost equal to about $2 or something like that per-share. And your bonus announcement of yesterday is about 20% return on the current value of the shares. So it is very, very good, and I'm sure the market is (inaudible) [shared that].

I'm only wondering that as NetSol's major shareholders, this bonus that will come to the NetSol USA, as a consequence of the general bonus amount. Are you going to benefit the shareholders here?

I think the biggest --

(inaudible)

Yes. I have (inaudible) this. First --

-- long time.

Yes. First thing is, as I said a minute ago -- that definitely [benefit] doing a valuation.

Second thing is, we like to be in that position in the U.S. -- and we will be -- to see some shares dividend pass on to the U.S. shareholders as we improve our bottom line in the U.S. So, I think that will be our end goal eventually.

Paul Cooney, with Maxim Group.

Hi, Najeeb.

Hi, Paul.

How are you?

Good.

Just a question -- what percentage of NetSol Pakistan do you own?

Can you answer that?

We own --

It's about 62%.

Yes, 62%.

Sixty-two percent. And what's the market cap in U.S. dollars of NetSol Pakistan?

The total cap, market cap, is, Naeem, about $120 million as today?

On last count, if you don't include the new shares issued --

Yes.

-- [it should say] pre-bonus, $2 a share; that's $100 million. And post-bonus of 60 million shares -- obviously $120 million.

Yes.

So by 3rd of March, if the stock stays at $2 or more, it's $120 million. But actually today is closing prices -- rupees -- 140?

One thirty-seven.

One thirty-seven --

[But then it is] $2.10.

Yes, that's about two and a quarter, exactly.

All right, so --

You're north of $100 million today, and will be north of $120 million post-third margin, if the stock stays where it is.

Great.

So just our ownership in NetSol Pakistan is worth $74 million?

Yes.

All right. So basically, that's about -- what is that per-share -- the 27 million shares fully diluted?

Yes. Yes.

You give me your number, Paul.

evaluation, just on our ownership in NetSol Pakistan, is $2.75?

That's what we were trying to say to the gentleman earlier on -- that the ownership -- this free and clear share ownership -- no liability against -- is being owned -- that much free value off NetSol Pakistan --

Yes.

-- on our books, in addition, obviously to NetSol USA business and the NetSol business in the UK.

And what percentage of the total business is NetSol Pakistan?

It's about 53%.

Asia-Pacific -- we college Asia-Pacific -- stem from (inaudible) services, (inaudible) region. Of course the delivery capability also serves U.S. customers -- some of them -- some in UK.

But the revenue's about 53% for Asia-Pacific, the total revenue.

All right, so it's about 53% of total revenue. And based on the valuation in Pakistan, our ownership in that is $2.75 if you converted it to U.S. dollars?

Yes. Yes.

All right --

[You're very smart there], Paul.

The other question I have is -- based on what the gentleman was saying about the 20% dividend or reverse split that was paid out --

No, no, it was forward -- it was forward split.

All right. But that didn't reduce our percentage of ownership --

No, not at all, not at all.

(inaudible)

-- the same way.

Everybody -- exactly.

But all it was -- it was like just having -- you don't own any bigger percentage of the company; you just own more shares?

That's right, yes.

Yes. It's the same percentage, everybody gets the same bonus based on their shareholding.

Yes, but Paul, if -- keep that same concept -- if the stock stays where it is post the dividend -- so for example on the 3rd of March, when we get the extra [30%] shares, if the stock stays where it is, then we have -- our valuation of the Company increases by 20% of what we own. Yes.

Let me ask you something -- if that's what the valuation is -- I don't understand how that doesn't show up in book value, or something like that.

I don't think it is updated. It's like -- if you own the building, and the market value is different than what the cost was -- so you can, under the GAAP -- if I'm correct -- you can update the value. It's just that if -- let's say, if you want to sell 10% -- I'll just give you an example; you're not selling anything -- but if you sell 10%, so much value will calm to the parent in terms of cash generated by selling, let's say, 10% of the ownership, which is far greater than in the last two years -- has gone up technically, what, about eight times from (inaudible) price exclusive, including bonuses.

But without a doubt, we have seen a run-up in our valuation, possibly because of our fundamentals, but also by creating a bigger capital structure.

And finally, before we move to the next question -- the bigger valuation you have, the stronger you are. [Think] if you attract better chances for bigger projects in Pakistan in the region, so company strength is really displayed by the valuation of the company.

So did you just say, as far as -- I'm looking at this thing and saying, all right, just based on the pure numbers that go to your bottom line, the growth rate of your company -- if you do a straight [peg] ratio, the stock looks attractive.

Right.

But if you do a sum-of-the-parts analysis on what the company is worth on paper, you've got $2.75 in valuation, based on what that 53% of your company is trading for in Pakistan right now. You've got $8 million in cash, and then you have to add -- you basically figure out what the other 47% of the Company is worth -- be it a substantially higher number than where the stock price is trading right now.

Can you spread that around a little bit, Paul?

Well, it certainly helps, Paul. The [U.S.] shareholder of the company which owns the premium company in Pakistan, the most premium in every category. So it certainly helps to be a [partner] in that ranking. And we get that kind of valuation attention from investors and institutions.

Why that it's not translating in your stock price right now here in the U.S.? Is it just that it's under-covered? I mean -- I just don't get why the stock is trading at $2.10 if --

Well, the common feeling is, obviously, we get penalized by the events in Pakistan, unfortunately, but that is [nothing to do] with the fundamentals. And also -- I'm not a market expert; we just run our business -- but we feel that -- our financial markets are also struggling, and that is impacting the stock. That has nothing to do with our fundamentals. I'm sure Naeem will have different color, but this is my view.

Yes. I also believe that we are not on an off radar screens. We're not as followed. I believe that you rightly said -- sum of the parts is worth more than the whole company. And really, it's a matter of getting the right coverage, being on the right screens, radars, and so on. But it's only a matter of time as the revenue increases. We'll get bigger critical mass and have more analyst coverage.

People will discuss (inaudible) [of cost] arbitrage that you just highlighted. And I believe that our company is a sort of undiscovered gem, really.

Okay.

We will continue to [develop and] perform. This is the third quarter in a row, showing profitability. We'll continue to get better and better, both top line and bottom line. And I'm pretty sure, like Naeem said, we will be discovered, and you will see much better valuation. That's what we're trying to achieve by just running a good business, sound business, long-term vision. And I'm sure this will translate into better valuation.

Thanks.

Thank you, Paul.

Operator, next question, please?

Jim Gentrup, with Meadowbrook Capital.

Good morning.

Hi, Jim.

How are you guys?

Good, fine. How are you?

Good, good.

Just wanted to -- one major question, really, and maybe a couple follow-ups. Can you talk to me a little bit about the relationship between future licensing revenue and service revenues? Is there -- because obviously, most of your revenue's coming from the service side right now. Was just curious of how much this translates into licensing revenue.

Naeem, you want to handle that?

Yes, absolutely.

See, there's a link between services and license where LeaseSoft is concerned. So more license we sell, more services revenue comes as a result of those license sales.

So we have two types of service revenues. One is associated with LeaseSoft; others is totally project work or the TiG relationship, or any other outsourcing and government work.

So as you see -- as license sales increase, that revenue will increase in line with that. And other business is purely growing organically through our own relationships and marketing.

so the service revenue -- the one type of service revenue is more of an implementation, then?

Yes. (inaudible) [to clarify], when we sell a LeaseSoft license, we also develop some customization for each customer. So we categorize the customization as services. And then we have additional implementation revenue, where we actually go on-site and install. Sometimes that can be a three-month install, and we could have 10, 15 people working on the project; that can generate a lot of revenue.

And then obviously, maintenance and support ongoing -- that also obviously adds to the services revenue. So that is a very high-value revenue in terms of [an amount that] we can charge, because it's related to LeaseSoft.

The other revenue's purely based on services within several other domains that we have in financial services, and government and defense, and so on.

Can you give us a little better clarity on what the breakdown is right now among the current service revenue and backlog between follow-on licensing revenue and just IT -- like separate service contracts?

Yes, sure. The way, on the license side, it works is that if you break LeaseSoft into three segments, one would be -- one third would be maintenance and support.

There would be -- so for example, if we did $10 million in LeaseSoft alone, then we'll do -- one third of that will be maintenance. And that will be within services of LeaseSoft. And we have another one third of revenue that would come from existing customers; again, that is services. In the last third will be made up of license and other revenue -- new sales.

That make sense?

Yes, that does.

So one third, one third, one third on LeaseSoft side. And obviously on the services side is all services; it's just pure services. So the split you see, basically -- and then maybe we can provide, Tina, a more detailed split within services of how we separate the services for LeaseSoft, as opposed to non--LeaseSoft services. If you need that information, we can provide that.

Okay. All right.

The licensing growth year-over-year this quarter was not that strong; it was 5% or something like that, year-over-year growth. Was there some -- is there always some lumpiness here? Was last quarter, the December quarter last year -- was it abnormally strong? Can you talk a little bit about what happened there, or what--?

Okay. That's a very good question.

Traditionally, if you've followed the Company over the years, our first quarter of the fiscal is always the slowest. And we were very good in closing some deals, which actually -- a lot of the deals closed in the first quarter. And so we picked out a lot of the pipeline, which was in the second quarter and the first.

So basically, if you like, our half-year is right on target. So we picked up better revenue in the last quarter we were expecting. And that obviously had some impact on this quarter, but there's no reduction in the pipeline.

So what we're saying is, keeping in view our backlog of business we've signed, as well as the new pipeline we have, we're expecting a pretty good six months going forward.

And can you further break that down into -- when you say -- would it be more -- the second half be more licensing -- higher growth in licensing, or would be higher growth in -- what would be a little more -- or should we just expect the services revenue to continue to --

Well, I expect license revenue to grow, better than in the first six months, from what visibility I have, and depending on how we execute and close. But I see, in terms of traction in sales, license revenue would certainly be in line or better than it was in the same six months in the second half of last year.

Okay, so that would bode well on service revenues coming after the fact?

Absolutely. Absolutely.

Okay. All right. Thank you, guys, I appreciate it.

Thanks, Jim.

Operator, next question please? We're about to --

This does conclude the Q&A session. I'd like to turn the floor back over to management for any closing comments.

Thank you. Thank you very much.

I want to thank all our shareholder analysts. We want to show you the management is brilliantly working very hard to continue to deliver our best results in better results. They are committed to enhancing shareholder value for investors, and delivering growth and profitability.

It's central to the process. I am extremely pleased with the solid results of the second quarter, and look forward to an even stronger second half. We will continue building out our strategic business model of expanding our IT services business worldwide and providing leading-edge enterprise software solutions for the financial sector.

Look forward to talking to you again in next quarter to provide an update on our targets. Have a great day.

Ladies and gentlemen, this does conclude today's Teleconference. You may disconnect your lines. At this time. We thank you for your participation.