NetSol Technologies Inc (NTWK) 2009 Q2 法說會逐字稿

Greetings and welcome to the NetSol fiscal second-quarter 2009 conference call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this call is being recorded. It is now my pleasure to introduce your host Christopher Chu, Grayling Global for NetSol. Thank you, Mr. Chu, you may begin.

Thank you, Operator. Hello, everyone and thank you for joining us on the NetSol Technologies fiscal second-quarter 2009 financial results conference call for the period ending December 31, 2008. I hope you have found the PowerPoint presentation we prepared to supplement this call and will follow along with us. The slide numbers we refer to are found at the bottom of each slide. The presentation may be found on the main page of the investor relations section of the NetSol website located at www.NetSolTech.com.

In addition, I would like to remind you that we are recording and webcasting today's call. The webcast archive of the call will also be available in the investor relations section of the NetSol website. Please proceed to slide number 2 as I read a brief Safe Harbor statement.

This conference call and presentation may contain forward-looking statements. These statements reflect the current belief of NetSol Technologies' management as well as assumptions made by and information unavailable 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 amongst 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 in exchange rates and changes in national and super national law, particularly with regard to tax regulations. The Company assumes no obligation to update forward-looking statements.

Moving to slide number 3, we are pleased to have presenting today Mr. Najeeb Ghauri, NetSol Chairman and Chief Executive Officer. He is joined by Mr. Dan Lee, NetSol Chief Financial Officer. Mr. Naeem Ghauri, Europe Division President, also joins us today and will be available in the question-and-answer session. I would now like to turn the call over to Mr. Najeeb Ghauri. Najeeb, please go ahead.

Thank you, Chris. Good morning and thank you for joining us today. If you join me on slide number 4, we start with some topline financial metrics on our six-month year-to-date financial performance for the first half of our fiscal year 2009. We see that NetSol experienced a sustained decline in the year-over-year revenue.

The decline in revenues in the first half of fiscal '09 and particularly in the fiscal second quarter primarily reflect the weakness in area of high-value software license sales and large outsourced business solutions as customers in various geographies are being materially impacted by the global economic downturn and have delayed purchasing decisions or are extending their current purchasing cycles.

Several major auto captives incurred their own losses and are cutting spending while financial sector customers are also experience similar pressures. That being said, automakers still have a strong need for our custom software solutions and we are still exploring large global frame agreements with potential and existing customers, but on longer decision timelines.

The decline in topline results flowed through GAAP net income and EBITDA which also reflected increased costs associated with our investments in North America, hiring costs of a new CFO, upfront cash and investments for some strong new joint ventures for programming services, our new global headquarters including training facility and cash reserve provision for accounts receivables.

Given the recent weakening of the ongoing economic conditions, economic downturn in the global arena we have initiated steps aimed at addressing the current market conditions and aligning our operations to current business conditions. If you turn to slide number 5 we will detail specific streamlining and efficiency measures.

These actions are being led from the top. As CEO, my salary and that of our top business division officers have been reduced by up to 15% as part of our dedication to managing this historic downturn in the global economy. As we communicated previously, the senior management team also returned to the Company earned cash bonuses of approximately $400,000 and stock options granted in 2008 that would have been expensed at much higher value.

Overall we have reduced our global headcount by 10% we are consolidating our Calabasas offices into our Emeryville global headquarters in California. We have also closed two satellite offices in Karachi and Rawalpindi in Pakistan. We have frozen capital expenditures for the remainder of fiscal 2009. We expect annualized cost savings from these steps to approximate $4 million in the calendar 2009 and we are actively conducting ongoing assessment of our operating structure and resources to drive further cost efficiencies.

We believe these are difficult but appropriate steps to adjust to the current economic environment as we look to ensure NetSol continues to innovate and deliver world-class products and solutions to its customers worldwide.

If you move to slide number 6, let me highlight some of the key fiscal second-quarter wins and customer focused developments. Nissan Financial Services Australia went live with NetSol Technologies' suite of financial products including licensing, customization and implementation of the NFS or NetSol Financial Suite application, credit application process system which is CAP, contact management systems or CMS for (inaudible) business operations and Wholesale Finance System or WFS for wholesale finance management.

NetSol was awarded a major consulting services contract with a leading commercial bank located in the UAE or the United Arab Emirates, to provide consultancy services in the areas of information, security and quality engineering. We signed a Business Process Outsourcing agreement with the AJK Group in Europe to provide accounting services to the Company's trust and foundations under their administration of AJK.

In Pakistan we signed a number of healthcare and public sector related projects. Also during the quarter we hosted our annual NetSol Solutions Conference which was attended by more than 30 clients from around the world. Our solutions conference offers customers a unique interactive customer focused forum on NetSol's financial suite product offerings, best showing solutions, global business services and client delivery initiatives. The event was held at our new Emeryville global headquarters right in the heart of the San Francisco Bay area.

If you now move to slide number 7, I'd like to spend some time on one of the key strategic developments during the quarter which focuses on our entrance into the SAP services market. Our acquisition of Ciena Solutions in the fiscal second quarter expands NetSol's offerings into SAP consulting and staffing services.

Shortly after closing this transaction we followed up with a key announcement regarding NetSol being awarded SAP PartnerEdge status with our SAP practice group now an official SAP Services Partner. Our entrance into this area allows NetSol to address one of the largest segments of the IT service market and it aligns directly with our strategy to expand our reach within the large North American IT services markets.

As a sign of our early success in this area, we recently won an SAP services contract from a leading US-based energy utility company and are quite excited about our future business prospects for this company. Based on final transaction closing the new SAP practice contributed one month of revenues to the fiscal second quarter 2009.

If you now move to slide number 8, based on these aforementioned fiscal second-quarter achievements, I'd like to take the story forward and detail for you some of the strategic actions that we are currently taking to target the most attractive market segments in this challenging economic environment as we evolve our go-to-market approach to manage market conditions more effectively.

Firstly, we are currently in various stages of discussions regarding potential joint venture opportunities as globally we continue to see ever rising demand for high-quality low-cost outsourced IT services especially in this serious recession and cost-cutting environment. We're seeing strong interest from potential joint venture partners looking in the United Arab Emirates' oil-rich Gulf countries and other regional countries to leverage NetSol's CMMI Level 5 center of excellence. Joint venture opportunities offer NetSol a range of benefits including enhanced customer development channels, recurring revenue streams and increased financial visibility.

Second, we're actively targeting key market verticals where we see stronger demand in the current environment and leverage our existing expertise to meet those customer needs. These targeted sector verticals include healthcare, with our hospital management systems offering we see this as an exceptional area of international and domestic US growth with current interest from several US-based hospital facilities and the recent HMS win in Pakistan.

The alternative and renewable energy sector with the current US political environment changing and green initiatives rising in importance we will develop a customized NFS product platform to meet the unique needs of the space.

And thirdly we are looking to offer customers new ways to leverage our license-based high value software offerings to meet the challenges of the current market environment. We're offering customers the ability to spread the cost of high value software licenses over the lifespan of the agreement, helping customers access the critical software applications they need to effectively manage and grow their business while addressing current budgetary issues.

We are currently exploring this with potential customers and believe it will provide benefits in the second half of 2009 and beyond. We believe these actions address our customers' needs while driving our pipeline development and topline sales.

If you now move to slide number 9, I'd like to walk through our most recent announcement regarding our signed letter of intent to acquire ID Interactive. On February 10, 2009 we signed a letter of intent to acquire a majority stake in ID Interactive Holdings Ltd. ID Interactive is an award-winning software and multimedia developer established in 1995 with offices in New York and in the UK. This acquisition would extend NetSol software development capabilities into leading edge mobile technology and multimedia content delivery.

ID Interactive's platform has been certified by 25 major mobile operators worldwide including AT&T, Orange, Sprint, T-Mobile, Verizon and Vodafone representing more than 300 million mobile subscribers. Their UrTone application has been accessed by more than 1.5 million music fans in the pre-launch phase alone. This despite weakened economic economy condition mobile data services and interactive content continue to represent high-growth markets and ID Interactive matches nicely with our expertise in outsource software and application development, expanding our telecommunication vertical expertise.

While we have moved away from more aggressive M&A activity in the current environment, we did see this as a truly unique opportunity which requires a modest upfront cash investment and offers a multiyear performance based earn-out which would benefit and be in the best interest of both organizations as we look to enter this extremely attractive market segment.

As we turn to the financial review I'm very pleased to have Dan Lee, our new CFO, to join us on the call today. Dan brings more than 25 years of finance and accounting expertise with broad-based high technology expertise as a senior executive with experience leading the financial operations of publicly held companies. In bringing Dan on board we have furthered our objective of strengthening our accounting and finance function as well as our senior management team ranks. With Dan we have also beefed up our corporate finance team to better serve and improve our compliance standard.

I also want to thank Tina Gilger for her years of service and assistance in making this transition. For those of you on the East Coast, Dan and I will be in New York in the next two weeks meeting with the current investors and funds as well as some new investors and look forward to seeing you. Dan. I'd like now to invite Dan -- slide number 10, please, Dan.

Thank you, Najeeb, and good morning, everyone. Thanks for joining us today on this conference call. As you are all aware, this is my first quarterly results call as the new CFO of NetSol Technologies. I do want to thank Najeeb and the rest of the management team for giving me this opportunity today to present NetSol's strategic financial and operating performance.

I'm looking forward to all of the exciting opportunities that lay before us as we look to expand upon an attractive and steadfast core business model that is also evolving with the times. My commitment is to continually maximize shareholder value through all of our investors while at the same time providing strict financial oversight and transparency into our numbers.

Now let's turn to slide number 11 which is our revenue performance over time. For the first half of the fiscal year we had revenues of $14.6 million which represents a year over year decline of 15% contrary to NetSol's compound annual growth rate of 58%. In the fiscal second quarter year-over-year revenue declined 37%. The quarter's revenues were $5.3 million as compared to $8.4 million a year ago.

This is our seasonally slowest half of the year and this quarter's revenues were further affected by the global economic slowdown. This resulted in delays and the lengthening of time that software and services contracts are being executed by our large enterprise customers and perspective customers.

Turning to slide number 12, we take a look at the major components of revenue for the fiscal second quarter as compared to the year ago period. The decline in net revenues this quarter was primarily due to softer license sales where we experienced a 77% decline year over year. The existing maintenance fees were consistent with the year ago period. Service fees contracted 23% year over year.

As in the past service fees related to license contracts are recorded on a percentage of completion bases as such these revenues are spread over several quarters as the implementation, data conversion and training components from the contract are completed. NetSol's gross margins declined to 27% in the fiscal second quarter versus 57% in the year ago period. Some of the extra expenses that contributed to lower margins were the new facilities cost of our upgraded global headquarters in the San Francisco Bay area.

Slide number 13 shows a breakdown of revenue by business. For the fiscal second quarter 2009 as a percentage of total revenue IT and consulting services represented 59%, license fees represented 12% and maintenance fees stayed relatively stable at 29%. On a geographic basis for the second quarter of 2009 -- fiscal second quarter, as a percentage of total revenue Asia-Pacific represents 62%, North America represented 20% and Europe represented 18%.

Slide number 14 shows the breakdown of the operating expenses for the fiscal second quarter of 2009 as compared to the year ago period. Total operating expense increased 27% year over year. Bad debt provisions increased this quarter after a global review of our accounts receivables and the establishment of appropriate reserves. I'll only add that we will continue to seek avenues for streamlining our business as Najeeb has already shared with you NetSol's cost containment measures.

Moving to slide number 15, we'll take a look at GAAP EPS. NetSol's GAAP net loss applicable to common shareholders was $3.2 million or a loss of $0.12 per diluted share versus GAAP net income of $433,000 or $0.02 per fully diluted share in the year ago period. The second-quarter GAAP net loss includes transaction losses on foreign currencies of $195,000.

This was a result of the devaluation of the euro in relationship to the Pakistan rupee that occurred during the quarter. Therefore some Euro denominated customer transactions in our Pakistan subsidiary had currency transaction losses. Going forward we will be evaluating the possibility of hedging our currency risk in a manner that's appropriate for the Company.

Minority interest in subsidiary income was deducted in the amount of $32,000 for the second quarter. This deduction is related to the minority interest in earnings in several of our subsidiaries. The net income attributable to the minority owners is deducted from NetSol's earnings. In the current quarter this figure is much lower than in previous periods because of the lower level of net income of those subsidiaries.

Slide number 16 shows NetSol's EBITDA performance on a quarterly basis over time. The second quarter recorded an EBITDA loss of $1.9 million or $0.07 loss per share. EBITDA is defined as earnings before interest, taxes, depreciation and amortization. The Company uses EBITDA as a measure of the Company's operating trends. Investors are cautioned that EBITDA is not a measure of liquidity 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.

NetSol ended the quarter with approximately $10.4 million in cash and restricted cash compared to $8.5 million in the year ago period. I'd now like to turn the call back to Najeeb to review the outlook and some closing remarks.

Thank you, Dan. Overall our fiscal second quarter 2009 was a challenging period as we saw large customers license sales and IT services purchase decision placed on hold as our customer pipeline dealt with their own internal budget constraints and timing issues. While we saw some evidence of this in our first fiscal quarter of 2009 the impact accelerated sharply in the fiscal second quarter 2009.

When the pipeline remains very healthy and we are encouraged by the level and types of new opportunities we are seeing in terms of joint ventures interest, licenses and outsource services deals, the timelines on the final decisions remain uncertain. I remain quite bullish for the long-term as well as 2010 and beyond. These factors do not afford us an adequate level of short-term quarterly visibility for clear financial guidance for the second half of fiscal 2009.

As many other companies have done in recent weeks, we are pulling our forward-looking guidance at the current time until we can more accurately gauge hard visibility into customer purchasing cycles and timing.

That being said, if you move to slide number 17 let me reiterate some of our core business drivers which we see serving as a foundation for long-term growth going forward. We are investing in North American sales and marketing the biggest markers for NetSol offerings.

Offering -- maintaining our leading market position for end-to-end leasing solutions in Asia; addressing new geographic markets including the Middle East, Central and South America; we're expanding the penetration of our new SAP and BPO practices; expanding and exploring joint venture opportunities; targeting high-growth market verticals such as healthcare, alternative renewable energy and mobile telecom through our LOI and with ID Interactive, and exploring a new license pricing model with new customers all while addressing internal cost efficiency measures.

In conclusion, NetSol is moving aggressively to address these historic market conditions through cost reduction measures and actively evolving our go-to-market strategy to be smarter and more targeted in meeting our customers' needs while addressing the more active segments of the global IT services and software markets.

While customers in many instances are currently holding spending, it is our view that the fundamental demand and need for our strategic software and outsourced IT services and best showing model remains intact. We believe that as customers realize they need to continue to operate more efficiently these (inaudible) channels will resume and these actions we are taking to manage the downturn will play even better dividends -- and will pay even better dividends in terms of growth in 2002 (sic) and beyond.

I believe once we get past the current hesitation to spend, NetSol will resume its ability to grow faster than the market as NetSol has for many years. With that I'd now like -- the call over back to the operator to facilitate the question-and-answer session. Operator, please take the first question.

(Operator Instructions). Joe Giamichael, Rodman & Renshaw.

Good morning, Najeeb, and welcome, Dan. Just a couple questions. I wanted to start out by addressing the balance sheet. Your receivables have grown quite significantly while the payables have actually come down on a year-over-year basis, all of this while revs have slowed. Can you walk us through what's going on there and do you anticipate some write-downs even after your recent review of those receivables?

I'll let Dan answer that. I'll make one comment, Joe, that actually from Q1 into Q2 obviously (inaudible) have come down. But I'll let Dan give a little breakdown if you'd like to.

Yes, we definitely collected a good chunk of receivables during Q2, so the balance of receivables is actually down from Q1, so we're pretty happy about that. In addition, we did take an opportunity to look at all the receivables globally and to really get a feeling for where the weaknesses are in receivables and we did take a significant amount of provision against those during the quarter.

And so we're thinking that the receivables are still very much concentrated in some very large enterprise customers. And while we're seeing this economic slowdown impacting our sales, we believe that the majority -- the vast majority of our receivables are in pretty good shape.

Have you been extending terms and funding -- essentially funding the receivables? It seems like they're at a very high level relative to the revenue run rate of the business.

Actually that I can say. The fact is, Joe, as he mentioned, Dan mentioned that we have improved our collection and most of these customers are literally Fortune 500 companies in the auto sector and banking sector. We don't really see any issues, just delays, but a couple of the provisions we took are based on -- we felt it was prudent to have some provision which is about what $500,000, I believe, Dan, this quarter?

And we believe we have been aggressively reaching out to our customers in the US, Europe and, of course, (inaudible) try to maximize our collections. So the stand we're taking is quite important under these very difficult times [all over the world], you know.

Okay. We'll move on to another question here. Given how rapidly the environment has deteriorated, you've mentioned having less confidence in the visibility, but can you give us a sense of what level of visibility you feel like you have as a base case scenario as we look out over the next 12 months? I'm not asking for specific guidance, just sort of have you started to see trends flatten to improve and what sense do you have over the next nine to 12 months?

The thing is, as I've laid out in my presentation, the cycle has slowed down; the (inaudible) have slowed down pretty much across the globe. But the interesting thing is, if I talk about the license sales or leaseback, lease-off, they've been tremendous interest both in North America or in Asia and even Europe that people are looking to assist them on a regular basis. I can say big known customers, and there is a need there I would mention and maybe further add. But we don't believe that it is a -- this is just I believe a temporary cycle of the whole globe is under this recession. Naeem, you want to add some on the licensing?

Yes, sure. We are actually facing customers day in day out and they're in this conundrum of whether they make an investment now on a piece of software which could cost somewhere between $2 million to $3 million upfront and then maintenance and support over the years or to they delay this maybe (inaudible) for another six to nine months. And the situation is that they do need this software to bring them more cost efficiencies because the software does improve cost in the back office because it automates most of the (inaudible) process.

It's a question of dipping into their cash. As you know, liquidity, it's very, very tight across the board. So really there's this big, big conundrum whether to do it now or do it later and delayed then the costs stay where they are, the costs don't go down. And if they spend this money up front and they can reduce costs up to six months, but then they have to put the cash up front.

So it's what we face every day. The pipeline, we have said before, is there and the interest is there. But decision-making is very deliberated, (inaudible), but ultimately they do need this software. So it's a question of is it three months or is it six or nine. And to be honest with you it's very difficult at the moment to provide any kind of visibility.

Further, Joe, I want to add -- underscore a comment I made earlier in my remarks that the Company had initiated expanding our product offering. We know this was limited to this software application leaseback (inaudible) expanded into BPO space, we expanded it into SAP recently, now we announced another acquisition.

So we're not going to just wait for when these guys come back and buy our system. We're just going to continue to deliver our business model that is -- business plan that is to really expand some other complimentary areas so we can see some certain growth and recovery of some lost sales.

So all in all, yes, it is a most challenging time right now facing everyone in the world. But we are as a small company scaling up and scaling down as necessary to continue to expand our business. And I think in due time we'll come back and revisit our guidance.

Got it. I mean, there's no question that sales cycles certainly are elongating as people are much more hesitant to make any investment. And the returns have to be extremely compelling. Just to move on to the next question. Can you tell us a little bit more about the ID Interactive acquisition? Can you give us a sense of what their 12 trailing month revenue and earnings have been and what does this bring to the Company strategically? I'm just trying to get a sense for how material this acquisition is?

Sure, I'll let Naeem -- he's the one who's the (inaudible) deal. Naeem, go ahead, please.

Sure. Joe, ID Interactive is in a space which really is one of those spaces which has had less of an impact with the downturn. And we've been looking at this company for the last six months or so. And we found that they, although being a very small privately held company, the new technology and platform they have just launched with [Universal] is going to be driving a lot of traction and interest.

If you visit their website you'll see that the player has been downloaded more than [1 million] times and has been tested. So really we have some good hopes and optimism on the platform. They have a number of other products which basically are just coming on the market. They've been a family held small private company; main core business has been over the years in multimedia and software development.

However, they had put in about three years of research and development into the UrTone player and that is -- and they have signed contracts with uVerse and Warner. They are the two biggest content -- music content companies in the world. So their player, if you visit the website, their player can be downloaded through the website (inaudible) that will deploy it.

So I think that's where ID Interactive is. It does not bring a huge amount of revenue. What it does bring is a good diversification for the Company into mobile technology platforms which are complementary in the sense that we have a lot of capability in software development. They have a product which is got a couple of patents pending. We believe we can license this technology and we already have customers who are willing to use it.

This is not at a point where we have to sign up customers; we already have certifications from all (inaudible) areas globally in the US and in Europe. You can see the list of carriers who have already certified it. That is a huge barrier to entry in this space to get the certification. So they've got that, they've got two major content providers who have signed up and I believe you'll start to see some revenue going forward for the next quarter onward.

So I guess from that most of the development phase, or at least the current level of development phase, is behind the company and now they're carving out their universe and we should expect to see some revenue flows coming soon then -- on a more material basis?

Absolutely, Joe. Because the whole model for this acquisition is based on an earn-out. We had a very, very modest -- it's not even worth mentioning -- it was a very modest upfront investment and the entire valuation of the Company based on revenue and earnings multiples which are very much -- which are very, very -- from our company's point of view are very appealing and we will only pay for what the revenues generated and we have very, very high hopes they will generate revenues.

Good. Well, I certainly hope from everyone's perspective they hit their earn-outs. Last question and I promise I'll get out of the way. Given your current capitalization in the difficult environment that you're facing, I know there's a litany of cost rationalizations that you guys are going through right now. Do you foresee the Company being self-funding at these levels in the near future?

I'll let my new CFO answer that. I think he's in good command. You want to answer that, Dan?

Yes, thank you. Well, the funding environment going forward is very difficult out there and we're constantly reviewing our cash flow needs going forward. We don't have any specific plans to do any funding in the short-term, we think we can get the Company to be cash neutral at least and maybe throw off some cash. We're monitoring this economic situation very closely and we always recognize that bringing in more funding in a down environment like this could be fairly dilutive to shareholders. So it's something we're going to weigh and monitor very closely.

I guess I was more focused on the -- your timing for cash flow positive. I wasn't implying a capital raise.

We, as you know, Joe, have taken all the right steps the last six months or so to control our costs due to the downturn at every level, at every division, at every (inaudible) structure, at every office (inaudible). We're trying to be really much more healthier given the most difficult time the whole world is facing. So I'm comfortable and make sure that me and my CFO are on top of this cash management and when it's prudent manage our cash flow accordingly, you know.

Can I just add one thing here?

Sure.

Although I'm not the CFO, but certainly being hands on in running the European side of that business, some of these steps that Najeeb mentioned in his presentation, we preempted those, so those were in the works for more than three months now. So going forward these savings are already coming in to play. So when we hit the next quarter you will see an immediate impact of these cost reductions.

So they're not sometime in the future nine months, the majority of these reductions are almost immediate. So you would start to see the benefit of those. So we believe we can bring the revenue in line with the cost sooner rather than later as a result of what we preempted and therefore saw in the climate.

Got it. Thank you very much, guys.

Thank you, Joe.

(Operator Instructions). I'd like to turn the call back over to the management for any closing comments.

Thank you again for joining us today. We look forward to talking to you again next quarter to provide an update on our progress. Have a good day.

Thank you. This does conclude today's teleconference. You may now disconnect your lines. Thank you for your participation.