NetSol Technologies Inc (NTWK) 2010 Q2 法說會逐字稿

Greetings and welcome to the NetSol Technologies fiscal second-quarter 2010 results. At this time, all participants are in a listen-only mode. A question-and-answer session will follow a formal presentation. (Operator Instructions). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Christopher Chu for Grayling Global. 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 2010 financial results conference call for the period ending December 31, 2009. I hope you have found the PowerPoint presentation we have 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, that's NetSolTech.com.

In addition, I would like to remind you 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 beliefs 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 to 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's Chairman and Chief Executive Officer. He is joined by Mr. Boo-Ali Siddiqui, NetSol's Chief Financial Officer, and Mr. Naeem Ghauri, President, Global Sales, who will be available in the question-and-answer session. I would now like to pass the call over to Mr. Najeeb Ghauri. Najeeb, please go ahead.

Thank you, Chris. Good morning, everyone, and thank you for joining us today. With me I've got Naeem Ghauri dialing in from our Bangkok office, and Boo-Ali dialing in from our Lahore office. If you join me on slide number 4, I will start with the top-line overview of key perspectives on our fiscal second quarter.

This quarter was highlighted by strong performance across all key financial metrics versus the year ago period. The top-line revenue totaled $9.5 million, up an impressive 81% versus the year ago period, and up 25% sequentially. This marked our third consecutive quarter of double-digit sequential revenue growth as we further establish the upward trend in our growth trajectory.

Due to our focused drive to improve efficiency, the gross margins for the quarter jumped to 62% versus 53% just one quarter ago and 27% in the year-ago period.

Operating margins increased to 18% versus negative operating margins in the year-ago period. The GAAP net loss of $0.01 per diluted compared to the loss of $0.12 per diluted shares in the year-ago period, and non-GAAP EBITDA profitability for the quarter came in at $0.03 per diluted share versus an EBITDA loss of $0.07 per diluted share a year ago. Both dramatic improvements in our core business have strengthened significantly over year to year.

These improvements are even more notable when you consider that both GAAP net loss and non-GAAP EBITDA results for second quarter of 2010 include a $1.1 million or $0.03 per diluted share in expense related to the relocation of the Company's global and US operating headquarters from Emeryville to Alameda, California.

This move alone is projected to save NetSol an estimated $5 million in expense in a five-year period. Our US operations and now under the leadership of Mr. Imran Haider, who was recently appointed Chief Operating Officer of NetSol North America. Imran is an eight-year veteran of NetSol Asia-Pacific region and he brings broad experience and extensive product and sale expertise to a region we see as offering NetSol tremendous opportunities for future growth.

If we were to exclude the impact of the $0.03 per diluted shares due to global headquarters' relocation expense, NetSol would have reported a positive net income in the fiscal second quarter. With this expense behind us, we are reiterating our objective of returning the Company to GAAP profitability in our fiscal year 2010.

Overall, the strength of NetSol's quarterly financial results confirm our ability to successfully convert our business by applying into customer wins and improving financial metrics.

Now moving to number 5 on the PowerPoint, let's look at some of the key factors driving our renewed momentum. Let me start with some broad perspective on some key positive fundamentals driving our business. At this time last year, we saw a large strategic software solution sales solutions sales frozen and deferred. In the fiscal second quarter of 2010, we saw an increasing number of purchasing decisions moving forward, but slower than a historical norm. However, the increased propensity to spend among customers, and that still bodes well for leveraging our growing global sales pipeline for the second half of fiscal 2010 based on what we are seeing today.

The direct evidence of this was clear as our financial results reflected quarterly license sales surging more than 400% as compared to the year-ago period and rising 30% sequentially. The global nature and diversity of our customer base is also benefiting us as we can leverage growth opportunities in different regions of the world based on the pace of the local economic recovery cycle. For NetSol, this has meant excellent growth from our Asia-Pacific operations, particularly in China, which continue to perform exceptionally well for us.

NetSol maintains the number one market share position in China in terms of asset-based lending solutions. According to a recent article in Economist, the GDP growth of China was recorded at 10.7% in Q4 2009, while annual GDP was around 9%.

The growth rate is even stronger in the automotive vertical as China is now the world's largest auto maker market, surpassing the US in 2009, and the financial vertical as consumer lending continues to grow with the economy. Both these verticals play directly into NetSol's core solution strength.

Through the downturn, we continued to invest in our core NetSol Financial Suite or NFS offering, building in and preparing new capabilities to ensure we continue to deliver our customers the most advanced, captive finance and lending solutions possible. Based on our ongoing product investment, we are working on the development and testing of a new generation of NetSol Financial Suite offering for NetSol's North American market. This next-generation solution will offer NetSol American customers new capabilities for the integrated global solution with a wide range of new functional capabilities. We believe this new generation solution will place us in a much stronger and competitive position. As we move forward on this, we will look forward to update on our progress accordingly.

Our focus on global solution matches the growing needs of our clients for cross-border financial software solutions, and opens up a larger market opportunity for NetSol among existing as well as large new international customers. Here again, we also look forward to reporting back to you on our progress on this front.

And finally, the impressive product solutions and global delivery capabilities that our customers are increasingly leveraging are also getting noticed by potential strategic partners. We are actively reviewing opportunities with potential partners around strategic initiatives, which could strengthen our customer reach. We believe we have built a unique enterprise that could attract larger companies or strategic partners to create ultimate shareholder value for everyone.

If you now moved to slide number 6, we walk through how this renewed momentum translated into some key customer wins and pipeline opportunities. Some select customer wins in the first fiscal second quarter of 2010 included a major Chinese automotive finance company awarding NetSol a $2 million contract; Toyota Motor Finance China upgrading to a NetSol Financial Suite license; a BMW Group Financial Services awarded NetSol an additional services contract; a UK-based bank awarded NetSol $1 million plus major software and IT services contract; we secured a major information security contract in the mobile telecommunications sector; also an IT services contract win in Saudi Arabia as we look to ramp our joint venture incentives activities there and strengthen our presence in the Middle East region. Last, but not least, we were awarded an information security contract to implement a data center security project with a leading solution integrator in Pakistan.

Complementing our success in the private sector with our NetSol Financial Suite, we are also continuing to pursue some large potential opportunities in the government sector for our IT services, particularly in the e-government and defense sectors, as we mentioned in our last call.

As the bidding processes and timelines for these contracts are typically quite long and competitive, we do not include any potential future contribution in our stated financial guidance calling for 25% to 32% top line growth in fiscal 2010.

This concludes my strategic remarks. If you turn to slide number 9 for our financial review, I would like to now invite our CFO, Mr. Boo-Ali.

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

I would like to kick off the financials with you by moving to slide number 8, where we see NetSol's revenue performance over the last six quarters. Revenues in the second quarter of fiscal year 2010 total $9.5 million, up by 81% year over year, reflecting our third consecutive quarter of sequential revenue growth as our business continues to rebound from global recession-driven, low watermark recorded in the fiscal third quarter of 2009. The 25% sequential revenue growth in the fiscal second quarter was driven by license revenue growth in excess of 400%.

Slide number 9 shows the breakdown of revenue by business. For fiscal second quarter, as a percentage of total revenue, IT consulting and services represented 46%. License fees [created] 35% of revenue and maintenance at 19%.

On a geographic basis, for the fiscal second quarter of 2010, as a percentage of total revenue, Asia-Pacific represented 59%; Europe, 26%; and North America, 15%.

Moving on to slide number 10 and a look at GAAP EPS. NetSol's GAAP net loss applicable to common shareholders for the quarter was $447,000 or $0.01 per diluted share with a GAAP net loss applicable to common shareholders of $0.12 per diluted share in the year-ago period. Sequentially, our GAAP net loss was reduced by 86% year over year. GAAP EPS was negatively impacted by the $1.1 million in expense related to the relocation of our global operating headquarters in US from Emeryville to Alameda, California, which equated to an expense impact of approximately $0.03 per diluted share.

Noncontrolling interest income, previously known as non-interest income, deducted was $1 million for the fiscal second quarter. Noncontrolling interest income is related to the noncontrolling interest in earnings in several of our subsidiaries as the negated net income attributable to the minority owners must be dictated from NetSol's earnings.

Slide number 11 shows NetSol's non-GAAP EBITDA performance on a quarterly basis over time. Fiscal second quarter EBITDA income totaled $948,000, up $0.04 per diluted share compared to an EBITDA loss of $1.9 million or a loss of $0.07 per diluted share in the year-ago period.

Our non-GAAP EBITDA results were also negatively impacted by the $1.1 million in expense related to the relocation of our global operating headquarters in the US from Emeryville to Alameda, California, which equated to an expense impact of approximately $0.03 per diluted share.

Just as a reminder, EBITDA is defined as earnings before interest tax, 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. EBITDA numbers represented may not be comparable to similarly [calculated] measures supported by other companies. EBITDA, while performing useful information, should not be considered in isolation or as an alternative to net income or cash flows as determining [on the debt]. We believe EBITDA is one of the best [matrices] to measure underlying profitability of our business.

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

Thank you, Boo-Ali. Before we can call for questions, let's move to slide number 12 and let me provide some top-line perspective around our financial objective for NetSol performance outlook in fiscal 2010. This guidance supersedes all prior guidance and is based on market conditions as of today. We are maintaining our focus on driving improvements in quarterly revenue and profitability. Our comprehensive cost reduction and restructuring measures implemented in recent quarters are contributing to improved gross and operating margins. Revenues are projected between $33 million to $35 million, representing full-year 2010 revenue growth of almost between 25% to 32% versus fiscal year 2009.

We continue to forecast a return to GAAP net income for fiscal year 2010 versus a GAAP net loss of $0.30 per diluted share for fiscal 2009. Full-year license revenues are projected to increase more than 100% versus fiscal year 2009.

And finally, we continue to enjoy a strong revenue backlog and sales pipeline providing fundamental support for the aforementioned outlook. As we discussed earlier on the call, we're also continuing to pursue some large opportunities in the government and defense sectors that long [to see in] making cycles. Accordingly, these opportunities are not included in our aforementioned guidance.

Should a portion of these opportunities materialize, it would be incremental to the aforementioned guidance. Overall, we remain quite optimistic and excited on the outlook for our fiscal 2010.

With that, I'd now like to turn the call back to the operator to facilitate the question-and-answer session. Operator, please?

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

Good morning, Najeeb. So, first, I want to congratulate you because we have been turning the corner for some time here. But we will continue to have to keep doing EBITDA true-ups to get to these positive results. Should we anticipate further expenses associated with either the relocation efforts, or beneficial conversions? Or do you think we have an opportunity to see a nice, clean quarter here and see what the operating metrics have actually been?

It's a two-part question. I will take the first one and let Boo-Ali jump in on the benefit conversion part.

In terms of our relocation, we took this decision last year. As I mentioned earlier, that we are saving potentially $5 million in the operating expenses in the next five years alone. But in terms of one-time charge, this went through the exercise, and we agreed with [orders] to the exposure is about two years in terms of liability. So we have sued methodologies with the help expert advice that $1,073,000 approximately.

So, I think it may marginally go up in the quarter ahead of us if they are not able to rent the space, which they are trying into the market. But we have factored in I believe a rather low-case scenario. So the bulk of the liability has been provisioned. I expect marginal cost provision in the next quarter, but nothing like this.

In terms of beneficial conversion, Boo-Ali, do you want to help Joe?

Yes. The beneficial (inaudible) when compared other [issued], we anticipate expense to remain at around $0.5 million in the next two quarters as continuing to move forward. And from Q1 of '11 it will go down to around 50%. So in Q3 and Q4, (inaudible) $5 million per quarter and then in Q1 of '11 to go down to around $250,000.

So basically, just to further elaborate, Joe, we have factored in the next two quarters of this non-cash, but as Boo-Ali said, starting the Q1 2011, this non-cash will go down by half.

Okay. I think that's fine. We'll continue to look for some of these things to sort of skew your GAAP and non-GAAP numbers.

So let me move down to the next question, and I know you've already done some of this to some degree. I just wanted to revisit the concept. So the contracts that you have been winning, what would you say is the basis by which the client has selected NetSol, and what is the award process been from a competitive standpoint?

Naeem, do you want to jump them?

Yes. Joe, you know, really some of the markets where we are in, in Asia, China, etc. We have a huge competitive advantage simply because of the installed base that we have and how our product is being customized in the local language. Most of our major competitors in the US and UK have not been able to customize the product in the Chinese language, for example. And in China you can't assemble the system unless it's in Chinese.

So it's just not the language as well as the business process. China is very different to any of the other markets we operate in. And so is Thailand and other Asian countries.

So really we get a very competitive situation here, and we do come up against competition sometimes from a local company, but they wouldn't have the depth of experience or the installed base or the level of features that we have in the product. So we are winning literally eight out of 10 deals we go into. So we have a very high conversion rate.

And in the very sort of near future, the pipeline is still very strong and we continue to get new inquiries and new leads. So, in fact, in this quarter, we have picked up as many leads as we had in the previous quarter. So they're starting to sort of trend very nicely.

So the prospecting and pipeline opportunities still look very full to you?

Fuller than for a very, very long time.

Okay. And then just to touch upon something that you had just mentioned on sort of an award basis, you said you've been winning about 80% of the contracts you are going into. I know many of your investors have sort of been waiting with bated breath to hear more regarding the military contract. Is there any incremental color out there? And do you see some of your -- I guess could you talk about how maybe in the process, you feel you are better positioned than some of the competitors there?

Najeeb, can I pick this up? Joe, what's happening is the military one we announced because it was becoming material and it was getting leaked and within Pakistan, so we had to make an announcement. But other than that, we are actually in a number of other contracts which are quite significant in size and also getting good traction. So, really that's the only one you heard about. But we are very diligently working on a number of opportunities with the government, military or nonmilitary or both. And so, equally, we are waiting for decisions.

We are in a good position in all of the business we are bidding for. Obviously it's very difficult to say which ones we will win and when we will win them. These are government decision-making machinery. And it is -- it takes time you know.

But some of the ones we are bidding for are more urgent. They relate to security and the surveillance side of things in Pakistan, which has become a big issue. So we are participating in some tenders that relate to security as well.

So, therefore, we believe that apart from the defense bid we put in, we have a number of others that have an equally good chance of winning. So, we obviously will update you as soon as any news comes through.

How would you quantify the pipeline opportunity that you are currently involved with?

On the public sector?

Just across the board.

Oh, across the board? It's very, if you like, different from NFS through non-NFS. NFS is a typically $1 million to $2 million contract in license and then services. But these government contracts are multimillion dollar ones. But again, they have not as -- we don't have as many of the government ones as we have in the pipeline in NFS. So in terms of volume and numbers of contracts, there's more NFS in pipeline. But in terms of dollar volume, it would be much, much bigger in the public sector.

I guess what I was trying to do was to try and get you to give an aggregate view of your pipeline opportunities from a dollar value basis.

For the government side, it would be in excess of $100 million kind of numbers we are bidding for. But in NFS, it would be in the $30 million to $35 million range, in terms of number of projects we're bidding for.

Can you further qualify, Joe, when named, (inaudible) would obviously we decided after we announced a couple of developments in the past, we agreed we decided internally with the board that all the participation in the public sector in Pakistan, we would simply announce when they become material. So when Naeem was talking about a few new tenders that we have participated, and this is a large number of [cobat] again like I said clearly in my prepared remarks and for the [name said] that these are long-shot projects. But we definitely have not taken any input or factoring in our guidance for 2010.

But, however, going back to NFS, of course, that's our bread and butter and core business. And activities are quite growing in Asia especially. And also growing slowly but surely in UK. And we see more activity in the US market also in terms of queries and interest in our products.

Okay. That's good enough. Thank you very much, guys.

(Operator Instructions). Daniel Nye, Tail Wind.

Hi, gentlemen. How are you? Just a few questions if you wouldn't mind. First of all, on your six-month cash flow, there's a charge on your cash flow for increasing net intangibles. I presume that's the charge relating to NFS 2, the second generation. When do you expect those charges to begin tapering off of as the product gets finished?

Boo, you want to take the question?

Yes. I think the product will be ready by the end of this calendar year. And then, we will start amortization of the charge.

He's saying basically -- what he's saying is, just to recap, by calendar year, not fiscal year, but calendar year 2010, we expect the product completions and then start amortizing it.

I see. So I can expect -- it's fair to say that I can expect another six months of the charge at the same level then that charge begins tapering off over the period after that?

(multiple speakers) we're not in beta, so probably the charges will gradually go down this year, the rest of this year.

Okay. Good.

Next question is could you just kind of clarify on your abandonment charge, if that is a cash expense and the percentage of that that was paid to extinguish the lease and the percentage required to move the Company? And what kind of level can I expect in the future of exposure to that lease?

Are you talking about abandonment of the Emeryville lease, right?

Exactly.

Okay, Daniel, this is a -- we haven't physically paid that expense, but we have taken the liability because this activity happened in the Q2 quarter. And we have projected about $1,073,000 based on a gain of FASB rules and expert advice from our commercial-based lawyer.

Also, just to recap again, I think Joe asked the same question, but I will repeat it again. We believe this is the bulk of the charge we have booked. And, if in the Q3, if by the time the building space has been rented and based on our assumption of certain growing market rate in the area, because they are a lot lower than when we did the lease two years ago, but we have factored in that exposure. So once the space is rented, then we will reassess if there is a marginal increase, we will address it in the respective quarter. And if, like if there is any gain, then we will definitely treat that as a gain if the actual cost is less than what we booked in this quarter.

Okay; I understand. And I'm sorry, this is a repeat of the question that Joe asked. And I didn't quite hear the answer. It wasn't clear. The beneficial conversion feature, there was a large hit from your income statement in this quarter. Do you expect a similar hit in the future? Or is that charge fully extinguished?

I think Daniel, yes, the CFO did say that the next two quarters, which is the second half, we expect just about the same ranges of $0.5 million each quarter which is about $1 million non-cash in the remainder of the year. And, but then also going into the first quarter, 2011, this will taper down to half of it, approximately. So, the burden will be a lot less starting 2011. And we will have taken out the bulk of the non-cash in the remainder of this fiscal year.

Okay, thank you. One last question. Can you just comment on the different projects you are looking on the side of strategic initiatives?

Yes. What we tried to provide folks is that Company -- as I've said in my prepared remarks, that we believe we have created a unique company which is really ripe for further growth worldwide. And given the capabilities we have, CMM and global customer base and the [processes] across our product line, we believe we are open to entertain any strategic initiatives which we have from time to time reviewed. And the Company is objectively going to acknowledge if there's opportunity to create interesting opportunity for the employees and the shareholders.

But more importantly, we are busy building a company which I believe [weather through dimension] as we've seen in the past, more could come and other alliances that will benefit primarily the shareholders. So that's what gets it was, how you meant.

Okay. So these are joint ventures and then other structures.

Yes. Whatever helps the Company and the shareholders.

Okay. Okay, gentlemen. That's great. Thank you very much.

(Operator Instructions). Ladies and gentlemen, there are no further requests for questions at this time. I'll turn the conference back over to Najeeb Ghauri for closing remarks. Thank you.

Thank you very much, operator, again. Ladies and gentlemen, we would now like to conclude the call. I appreciate your taking the call today, and we look forward to talking to you again in the next quarter, and you guys have a good day. Thank you so much.

Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you all for your participation.