NetSol Technologies Inc (NTWK) 2010 Q3 法說會逐字稿

Welcome to the NetSol third-quarter fiscal year 2010 financial results 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).

It is now my pleasure to introduce to Jon Cunningham, Vice President of Investor Relations with RedChip Companies.

Thank you, Val. Hello, everyone, and thank you for joining us on the NetSol Technologies third-quarter fiscal year 2010 financial results conference call for the period ending March 31, 2010. 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.

Before I introduce our speakers, I would like to remind all listeners that in this call, management's prepared remarks contain forward-looking statements which are subject to risks and uncertainties. Management may make additional forward-looking statements in response to your questions today.

Therefore the Company claims the protection of the Safe Harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. These forward-looking 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 other changes in the general economic and competitive situation, particularly in NetSol's interest and markets and additional future results and developments could be affected by the financial markets like fluctuations in exchange rates and national and international law, particularly with regard to tax regulations. In addition, any projections as to the Company's future performance represent management's estimates as of today, May 12, 2010.

The Company assumes no obligation to update forward-looking statements. We are pleased to have presenting today Mr. Najeeb Ghauri, NetSol's Chairman and Chief Executive Officer. He is joined by Mr. Boo-Ali, NetSol's Chief Financial Officer; and Mr. Naeem Ghauri, President of Global Sales and CEO of NetSol Technologies, Europe; from Lahore and London, respectively during today's call and will also be available in the question-and-answer session. Now I would like to pass the call over to Mr. Najeeb Ghauri. Najeeb?

Thank you, John, and hello, everyone, and good morning and thank you for joining us today to speak of a new set of milestones being achieved here at NetSol. We could not be more pleased with our progress to date and feel wonderful about being able to return the Company to profitability and deliver on our covenant to do so.

The return to profitability showcases that our business plan is working and we remain confident as we head towards the close of our fiscal year in which we expect to be in the black on the full year analysis. Our business highlights, both financial and otherwise, speak for themselves and future visibility and prospects have us very enthusiastic about our future.

At this point, I would like to state that I encourage an open dialogue among our shareholders, the NetSol management; and additionally, our investor relations partners at RedChip Companies. With that being said, I would like to introduce our CFO, Boo-Ali, to state the Company's financial highlights. Boo-Ali?

Thank you, Najeeb. Good morning, everyone, and thank you for joining us on today's call. Our financial highlights are many and we're very pleased with our progress as our revenues for fiscal year 2010 first quarter was up handsomely by 78% to $8.9 million.

Our net income per share for the quarter totaled $0.02 versus a loss of $0.19 for the same period a year ago. During this time, our present income increased to $2.6 million as compared to an operating loss of $4.3 million during the year ago period.

Gross margins improved to 61% compared to 10.7% in the same period a year ago. Net revenues from license fees in our core NetSol Financial Suite totaled $3.6 million, an increase of more than 1000%.

EBITDA totaled $1.9 million or $0.05 per diluted share versus an EBITDA loss of $3.5 million or a loss of $0.13 per diluted share in the year ago period. In the last nine months analysis, revenue increased to $26.1 million up from $19.6 million for the same period year over year, representing an increase of $6.5 million or 33%.

Net revenues from license fees totaled $9.52 million, up from $3.5 million for the same period year over year, representing an increase of $6 million or 172%. Gross margins also improved, increasing to 59% compared to 54%.

Operating income increased to $5.4 million as compared to an operating loss of $5.95 million in the year ago period. During the nine months after EBITDA totaled $4.1 million or $0.12 per diluted share (inaudible) EBITDA loss of $3 million or a loss of $0.11 per diluted share in the same period a year ago.

Furthermore, the Company is reiterating its previous guidance for fiscal year 2010, projecting the revenues in the range of 33 to $35 million, representing full-year revenue growth which will be 25% to 32% over fiscal year 2009.

The Company [projects to GAAP] net income for the fiscal year 2010 was a GAAP net loss of $0.13 per diluted share for fiscal year 2009. License revenues for fiscal year 2010 are projected to increase more than 100% over fiscal year 2009.

Obviously, judging from these results, you can see why we are enthusiastic for the future. With that being said, I would like to pass the call back to Najeeb to review our other business highlights and to detail our continued focus and objectives. Najeeb?

Thank you, Boo-Ali. In looking at some of the more major developments that have occurred at NetSol in the last quarter, we see several items of interest, including NetSol Technologies North America announced the formal launch of smartOCI, an SAP compatible, multiple catalog search engine. The launch will be on May 17, 2010 at the SAP Sapphire conference in Orlando, Florida which is targeting approximately 1000 SAP SRM platform customers.

smartOCI will be sold on a subscription business with the software delivered as software as a service or SaaS model. Also, NetSol Technologies and Atheeb Group formally launched Atheeb NetSol Limited, a new entity joint venture in Kingdom of Saudi Arabia.

Atheeb NetSol Limited joint venture is focused on market development opportunities around penetrating the software engineering arena in key business sectors such as telecommunications, defense, public sectors and finance, among others. Atheeb Group is a very well established and diversified group in one of the most well-capitalized and cash rich country. There are some major diversification and development projects underway in the Kingdom of Saudi Arabia and we believe that Atheeb NetSol Limited would be able to win some significant projects there in due time.

Also NetSol Technologies signed a new agreement with a Chinese finance company that is a major European bank and a multi-billion-dollar Chinese financial services group as partners. The client selected NetSol's NFS BI Module which is a unique end-to-end business intelligence offering.

China remains to be NetSol's very strong market as we are expanding into Chinese banking (inaudible) finance sectors in addition to our stronghold with nine plus multinational blue-chip auto manufacturers that are clients there. As you know, the Chinese economy continues to grow at an impressive rate of 8 to 9%, offering therefore a major market opportunity in many verticals and we're really excited about these opportunities in China.

Fortune 500 client in the US upgraded the NetSol Technologies LeasePak License. The highly scalable LeasePak solution offers the North American clients the ability to scale from a growth platform via modular components.

There have been some services and maintenance enhancements for a few US-based clients, signaling positive signs of recovery in the US market. We continue to improve our delivery, delivery customary service and implementation capabilities in our Alameda, California location which is seamlessly integrated with our most efficient and proven driven global delivery model and infrastructure.

In Europe, NetSol Europe [had a true enhancement] in service revenues with (inaudible) in Europe such as [singles healthcare finance] went live with LeaseSoft to support their healthcare financing business. Also (inaudible) lease group of Netherlands (inaudible) LeasePak, LeaseSoft business product portal along with system enhancements to support a major new European joint venture partnership.

In Asia, in early 2010, NetSol formalized a new entity in Thailand to gain traction and penetrate in growing financial sectors. We believe there are many new opportunities and verticals in the region with a handful of IT companies or solution providers such as NetSol. We have a background and a strong pipeline in Thailand and the regional markets.

Moving onto our biggest contributing subsidiary, NetSol Technologies Ltd. Pakistan has participated in three new bids in public sectors in the last three months, and they prequalified a most well-reputed IT company. In the last few months, NetSol has become one of the most prequalified IT companies to participate in various public and government critical projects through public tendering. In the past, we have run a few of these projects, and now we have been most actively bidding on higher value projects. When and if they are awarded in our favor, we will accordingly report back to you.

In January 2010, NetSol Technologies North America division scaled down its office space from Emeryville to Alameda in California, saving an estimated $5 million over the next five years. Our continued efforts to streamline North American subsidiary has started to show some positive signs of improvement in business development activities.

As we are optimistic about the US economy, we do foresee hiring some new sales personnel in coming quarters to grow our core business as well as service offerings. We strongly believe North American markets will eventually become our biggest operating markets as we strive to further establish NetSol's name in the B2B space.

Looking forward, it is our intention to further enhance our sales, delivery, client support to every customer worldwide in line with our relentless efforts to maintain 100% track record of never losing [a first client]. As a global team in Alameda, Silicon Valley, Bangkok, Beijing, La Jolla, London and [Rio] are available 24/7 to service and serve the needs of our clients anywhere in the world.

NetSol is committed to continue overall improving operating efficiencies, economies of scale and focused dedication in our NFS [store] line. NFS remains our core business, but we would enhance our effort and execution in public sectors in the Kingdom of Saudi Arabia and Pakistan and other regional markets.

The management is fully committed to building shareholder value by improving balance sheet, net income, and account receivable collections and overall enhance NetSol's [intrinsic] and market value. Furthermore, the management is aggressively launching IR and PR campaigns to share NetSol's story and its very bright future to a broader investment community, strategic partners and analysts. I am very confident that this will result in true and much improved evaluation and shareholder's value. Accordingly, I would now like to open the call up to our analysts, shareholders and interested parties by turning the call back over to the operator for questions. Operator please?

(Operator Instructions) [Daniel Nang, Tailwind Financial].

Congratulations on a great quarter. Just a couple of questions on my side, one affiliated with the cash flow statements and one affiliated with the lease on the property. Firstly, are there any additional charges we can expect from breaking the lease on the property in the Bay area?

Boo-Ali?

I'm sorry, I was lost on the call. I'm back here.

Once again, are there any additional costs or charges we can expect from breaking the lease in the Bay area?

No, whatever we have reported as a provision which is about -- close to $870,000 adjusted -- no we don't expect any further additional charges as of today. We're quite confident.

Okay, great. So that's a full and final settlement, basically.

It is really based on a GAAP basis, certain methodologies that guided under the US GAAP and by its auditors, starting from the last quarter and then this quarter. We don't expect late or expect any further than this because the place is rented out as of January of this year. So it has been mitigated.

Good. Next question I have is on your cash flow statements, on the cash flow from operations. You've got a rather large line entry here under non-controlling interest and subsidiary that raises the -- that adds $3.2 million to the cash flow. What is that affiliated with?

Yes, I think Boo-Alit will clarify, it has to do with minority interest. Boo-Ali, you want to clarify?

Yes, this is (inaudible) minority interest which then the Company had in different subsidiaries. As you know, in PK, we have two different subsidiaries in which 21% is owned by [Perant] and the remaining 49% by another partner. And this amount of $3.2 million represents the profit going to the other party in (inaudible)

This is a new terminology, Daniel. Instead of calling it minority interest, they're calling it (multiple speakers) exactly. So instead of a combination of all the minority interest, now the controlling interest line.

Okay, so just explain to me why that adds back to your cash statements?

Boo-Ali? Did you hear the question?

Yes. I think the amount has to be added back because it reduced our profits. I think you see that the profits had been reduced by $3.2 million in the income statement and that amount needs to be added back while calculating the cash flow statement (multiple speakers) not the P&L.

There's not a P&L effect. Actually the question, Daniel, is why it that back. I think Boo-Ali explained that because it has to be shown back as if this was not debt and we would have exactly different numbers.

And this is affiliated with the minority shareholders in Pakistan?

Yes.

(multiple speakers) PK?

Yes, mostly. That's the largest chunk, I think.

Okay. Thank you, gentlemen. That's all I have.

Bill Matson, RedChip Companies.

I had a question regarding the public sector projects in Pakistan. I was wondering if you could give a little bit more color as far as the potential size and also the potential for winning the contracts regarding the land record management system and also the work with the Pakistani military.

Naeem, you want to jump in? You just came back for the fresh information. Let me jump -- this is Najeeb here.

We have participated in as we said that in my script, about three contracts or three projects in those three months. And one has to do with land record. There's a couple of others we have not publicly reported their name or the size of the deal.

But most of these projects are quite big in size and volume and value rather. We believe because we've seen tremendous progress in this sector for our business, we believe that some of these contracts will be awarded this quarter, perhaps the Q1 2011.

And that said, NetSol is in a very good position and they're prequalified better to see some successes. And of course these are the contracts which we really have been working for some time. The defense one, we announced the bidding about sometime fiscal 2009. It has not been awarded to anyone yet. We are still in the running along with three or four other European and American bidders.

If you were to win some of these contracts, when would we first start to see the impact in the financial statements?

You know, most realistically, I think the impact could be in 2011. Because as you know, 2010 is just about a month and a half before we can close the books for this fiscal year. So realistically, we can see the impact in 2011 fiscal year if these are awarded in our favor.

Mike Vermut, Newland Capital.

Can you kind of give us a framework? I'm trying to formulate some kind of plan going forward just with your current backlog, the new product introductions, what kind of growth rates we should -- I'm not asking for specific guidance.

But should we see accelerating growth, should we see quarter to quarter growth from here on out. What should we think about with margins? And then tying to that, I think you get a pretty big valuation discount based on the Pakistani situation. Can you just tell us how that plays into the margins and how we should think about that here?

Let's myself and both -- Naeem will answer in two parts. But, Michael, the two things I want to add here; one is we are aggressively executing our business plan for this year. We have a guidance out there for 2010 fiscal and this will lead us to in our 2011. As we're planning our activities in 2011 and (inaudible) will give -- Naeem will give you a bit more color.

But on Pakistan, look, we are actually very blessed to have a much effective and one of the top notch IT talents in that region. That really puts us in an incredibly sound position to improve our margins and be able to deliver our system and services to customers worldwide.

So it's been a very effective business model for us in terms of financially speaking. And if you talk about other geopolitical, we believe for us we have never been affected and Naeem just came back from Lahore four days ago. We had some European and American business partners and they came back very satisfied. Naeem, why don't you give some more color on the backlog and what do you think your perspective is?

Mike, first of all, our clients have been almost immune from the geopolitical situation in Pakistan because our deliveries have never been affected. And to prove the point, we took four of our clients to Lahore just last week.

These are some of our larger clients, and they spent three days in Lahore and they loved the campus and they met a lot of our people, our staff and so on. They went back very happy. As a result, they have actually committed to growing the partnership.

And actually, obviously we haven't effected that into any numbers yet. But certainly when we do get something formal done, we will make the announcement.

But they went back and so really happy, so really from our point of view, location is not an issue. Secondly in terms of the pipeline and the backlog, you see this year has grown quite steadily and the backlog of contracts we signed earlier in the year has really helped continue to bring more license revenue in and that backlog is continuing to build.

We are now getting to a very strong sustainable situation where we a bad year in 2009, but there has been a major improvement on the upside, correction on the upside with the [auto captive] finance companies, they're starting to spend money.

So we're starting to see that into our license and services revenue. So I think we're going into 2011 with a good backdrop and I think we will hope to surpass what we achieved last year in both revenue and bottomline. But we are not actually sharing guidance until we actually get into the next year.

(Operator Instructions) Al (inaudible) National Securities.

Yes, I was wanting to check and see if you could maybe explain a little bit, how does your software, your leasing program differ from other programs that it works in a number of countries? And is this something that is protected, so somebody can't copy this?

Naeem, do want to answer that please?

Sure, the way we have actually developed the product is that we have specific versions of the product for different regions. So the US product is very much North American specific, because there are a lot of compliance and regulatory issues in the US when you are a finance company. So your software has to work according to compliance and regulation in North America.

Now as opposed to how the product will work in the UK/European market where there are different compliance and regulatory issues, and also the business process is different from country to country. So [what appears unique], in a way we are unique is the ability to develop several versions of the product which nobody -- none of our competitors have been able to do globally.

Some of them have done it maybe between one or two countries in one region, but we have actually effectively done it for the entire -- globally, in fact. So we are actually now in 25, 30 different countries.

So our software works in all different continents. So really that's what sets us apart, that we have this offshore facility which is very low cost base.

We're able to tailor our software very cost effectively to work in all different regions. Our competitors don't have that edge.

And secondly, the way we protect our product is that really the investment is the barrier. The investment our competitors have to make to tailor the product to be suitable regionally is the barrier to entry for them.

Because the cost is really from eight to one. So if we spend $1, they will spend probably $7 to $8 to do the same thing in the US or the UK.

So that gives us a big edge. So really that is a hard thing to replicate and we have also developed a lot of industry knowledge and domain expertise in the leasing, finance industries which is also giving us a very, very strong leverage.

Thank you.

Hope that helps.

Mike Vermut, Newland Capital.

Quick question for you. Actually two questions. Were there any non-cash charges from the conversion of those bonds this quarter? And where do we stand on that situation and how much is left on that?

In Q3, we don't have too many extraordinary charges. We had none compared to Q2 or Q1 this year. But we did have irregular BCF, or beneficial conversion features, charges as a result of some conversion by investors.

And where we stand with them, I think one thing we have to understand and appreciate that our investors (inaudible) have invested a lot of money in a very difficult economy two years ago, as you know. So they've been very friendly investors and always supporting the Company. So there is conversions periodically each quarter and I think the large note is reducing each quarter by the conversion. So that's a big plus for the Company.

So I think it's a normal standard procedure they're adopting to continue to convert, as and when they like to. But it's a normal thing for us and I don't expect any major charges or any surprise charges in the coming quarters.

And then can you also just quickly discuss the scope and just these large contracts that you are bidding on currently?

Yes, further, if you're talking about the ones in Pakistan, there's three bids that we participated in the last 60 to 90 days. They are some to do with surveillance, security in major parts of Pakistan and due to the perhaps geopolitical situation. And this is of course a serious (inaudible) value could be what, 10 to $12 million value.

There's others in the range of 3 to $5 million. The defense one which is still out there for some time is the largest one, if that happens.

So what we have done is we've really beefed up our efforts in improving other sources so we can participate and bid all the key projects that NetSol can offer services or technology or IT integration and so forth. I also said [we are a company by choice] and we are prequalified in almost every major contract and so we are actually waiting to close some of them and we will continue to bid on further new tendering contracts in the days to come.

Could I just add some more color?

Sure, go ahead.

Mike, equally what we're doing in Pakistan, we're replicating in Saudi Arabia now with a new partner who are again a very, very large conglomerate in Saudi Arabia. And through that partnership, we are now actually bidding for the local public sector, we're there as well which really for us is also quite an interesting opportunity. So really I think on both the fronts that we open now, we hope to get some successes in this coming fiscal year.

[Agha Sadaat], private investor.

I used to previously work for NetSol. So my question is, most of the revenues coming from the products, leasing and financing products, but NetSol has good links across the world with big Fortune 500 companies. So how much revenue we are getting from the consulting services?

I can see there's a lot of room for using more consulting services, just like other [VMM level five] companies are providing. So what is the direction and how much revenue currently we are getting from the consulting services, regardless of the products?

Naeem, you can better answer that.

Sure, I didn't catch your name again, sir. What is your name?

[Agha Adeel Sadaat].

It's a tough one in the sense that the product has given us a very strong core business. So when we try to go outside of it too much, we get a bit distracted. So really the consultancy or pure services business is an area which has not really grown. I think you're referring to more offshore services type of software development kind of work, right?

Right.

Some of the Indian companies do that. I think the difference here is that we have a very strong IP and it will charge a premium because of IP, that we are able to charge a $400, $500 a day [mandate] for the software development work we are doing in Lahore. If you are offering pure services work, we would be just like any other developer in India or Southeast Asia and then your rates drop down to $200, $150 a [mandate].

So what our objective is really to develop our products offshore that we can charge a premium onshore in the US, European, Asia-Pacific markets and that differentiates us from a lot of the other Indian businesses. So that is our key focus.

So we're not really planning to diversify in any major way into that sector, because we see so much more growth coming in from our core business, because our product is really just maturing now. And as you might be aware, that we are going to go to a next generation of the product.

So we believe that is going to open our products to not just leasing and finance, but also other lending businesses like mortgages and consumer loans and so on. So we actually within our core competency, we want to diversify into complementary areas rather than go totally outside of our comfort zone into areas where the margins are a lot lower, and I think that's what sets NetSol apart as a business.

At this time, I'm showing there's no further questions. I'll turn the call back over to Mr. Ghauri for closing comments.

In closing, our financial results continue to deliver material improvements in every major metric of financial health and we're really excited and optimistic about the future. We entered our fiscal year 2010 and with the most positive momentum in the Company's recent history and we see increased interest among our major customers as well as new potential partners in the sector. Additionally, we see excellent opportunities for collaboration and strategic initiatives as we head to the conclusion of the fiscal year 2010. Thank you all for your continued support and interest in NetSol.

Thank you. Ladies and gentlemen, at this time, we would like to remind everyone that a replay of this call will be available for two weeks from today, beginning 2 PM Eastern time, until Midnight on May 26, 2010.

The number for replay is 303-590-3030 for international calls, pass code 429-4953. An additional recording of the call will be available via the Company's website at www.NetSoltech.com for one year. This concludes the NetSol Technologies first quarter 2010 conference call. You may now disconnect.