NetSol Technologies Inc (NTWK) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the NetSol Technologies fourth-quarter and fiscal 2010 financial results conference call.

During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions). This conference is being recorded today, September 8, 2010.

I would now like to turn the conference over to Mr. Jon Cunningham, Vice President of Investor Relations for RedChip Companies. Please go ahead.

Hello, everyone, and thank you for joining us on the NetSol Technologies fourth-quarter and fiscal 2010 financial results conference call for the period ending June 30, 2010.

I would like remind you that we are recording and webcasting today's call. The webcast archive of the call will also be available on 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 general economic and competitive situations, 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 in national and international law, particularly with regard to tax regulation. In addition, any projections as to the Company's future performance represent management's estimates as of today, September 8, 2010. The Company shares 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 Siddiqui, NetSol's Chief Financial Officer, and Mr. Naeem Ghauri, President of Global Sales, who will also be available in the question-and-answer session. I would now like to turn the call over to Mr. Najeeb Ghauri. Please go ahead.

Thank you John, and hello, everyone, and thank you for joining us today. We are excited to share the details of our fourth-quarter and fiscal 2010 performance and provide a window into our business strategy going forward.

Of course, the big news today is that we have achieved annual profitability for the first time in two years, and the fourth quarter was our second consecutive profitable quarter, a trend that we expect to continue into fiscal 2011. We aggressively implemented our business strategy in fiscal 2010 and our focused efforts paid off with an influx of new contract wins, improved top and bottom line, bottom line growth, and ultimately greater value for our shareholders.

Fiscal 2010 was a historic year for NetSol. We look forward to fiscal 2011 with great enthusiasm.

With that being said, I would like to now introduce you to our CFO, Mr. Boo-Ali, to review the Company's financial highlights for the fiscal year and fourth quarter. Boo-Ali?

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

We couldn't be happier with our financial results and are excited to share these highlights with you today. We are proud to have met or exceeded our financial guidance estimates for the fiscal year ended June 30, 2010. Revenues for fiscal 2010 totaled $36.8 million, representing an increase of 39.1%, as compared to $26.4 million for the fiscal year 2009. This exceeded our previously issued guidance of $33 million to $35 million, representing 22% to 25% year-over-year sales growth for fiscal 2010. The increase in sales was primarily driven by a number of new NetSol financial suite license sales, particularly in China.

Net revenues from license fees in our core [national] financial suite product total $14.2 million, a year-over-year increase of 196%. Our net income attributable to common shareholders totaled $1.4 million, or $0.04 per diluted share, up from a net loss of $8.2 million or $0.30 per diluted share for the fiscal year 2009.

Operating income increased to $9.7 million as compared to an operating loss of $6.5 million in the previous fiscal year. As we previously forecast, cost efficiency measures and corporate restructuring activities completed in recent quarters improved our profitability.

Gross margin improved to 62.3%, up from 35% in fiscal year 2009. Earnings before interest, income tax, depreciation and amortization totaled $6.8 million, or $0.18 per diluted share, versus an EBITDA loss of $2.5 million or a loss of $0.09 per diluted share in fiscal 2009.

Now, I would like to turn to our fourth-quarter results. For the three-month period ended June 30, 2010, total revenue increased to $10.7 million, up from $6.9 million for the same period in 2009, representing a year-over-year increase of $3.8 million, or 56.2%. Net revenues from license fees totaled $4.6 million, up from $1.3 million for the same period a year ago, representing an increase of approximately 262%. Net income attributable to common shareholders increased to $1.5 million, or $0.04 per diluted share, as compared to a net loss of $900,000, or $0.03 per diluted share, in the fourth quarter of fiscal 2009.

Operating income increased to $4.4 million, up from an operating loss of $500,000 in the fourth quarter of fiscal 2009. Gross margins also improved significantly in the fourth quarter, increasing to 59.6% as compared to 57% for the same period a year ago.

EBITDA for the three-month period totaled $2.8 million, or $0.07 per diluted share, as compared to EBITDA of $600,000, or $0.02 per diluted share, in the same period a year ago.

Looking ahead to 2011, we are poised to grow our core NetSol financial suite business to 80% of our total revenue, up from the current level of 60%. We will also continue to streamline operating costs across the Company to further improve both gross and net margins.

While we will continue to invest in marketing and sales, we also intend to improve productivity, economies of scale, and the integration of various disciplines and processes. This constant improvement is expected to translate into an enhanced bottom line.

We also expect the recently announced restructuring of our subsidiaries and integration with NetSol Pakistan to improve our EPS following its completion. We plan to further streamline our corporate and finance structure to enhance value for shareholders by reducing non-cash items, one-time charges, and retire debts.

For fiscal year 2011, the Company's projecting revenues in the range of $40 million to $44 million, representing a full year of revenue growth of 9% to 20% for fiscal year 2010. The Company also projects earnings-per-share in the range of $0.15 to $0.20 for the fiscal year 2011.

At this point, I would like to pass the call back to Najeeb to review our business highlights for the fourth quarter ended June 30, 2010.

The fourth quarter of 2010 brought many achievements for NetSol Technologies. We signed several new clients during the quarter, including Volvo Auto Finance of China, GMAC, GAC-Sofinco, Sany Corp. of China and a few others.

During the fourth quarter, we successfully implemented our complete interface, our NetSol financial suite for products for GAC-Sofinco, a joint venture of Chinese [vehicle] manufacture, [Gong Zhu] Automotive Group Company. Ltd., and French finance company Credit Agricole Consumer Finance. The fixed cost project involved extensive integration with third-party vendors for accounting. The system was signed off and accepted by GAC-Sofinco on May 31, 2010.

We also secured two major projects worth over $3 million to complete our interface contract management system (inaudible) a major international automotive manufacturers captive finance company in the Asia-Pacific region. That's all fully automated the customer's financing business, providing improved operational efficiencies, and as contract lifecycle management increase financial visibility and quick return on investment.

We also signed a contract of significant value with Sany Corp. of China, the largest -- the world's largest concrete equipment manufacturer. The complete NFS suite was deployed by Sany Corp. across its vast dealer network as well as its business back-office centers across China.

The NetSol facility in Lahore, Pakistan cleared a stage I order for ISO IEC 2000. ISO IEC 2000 is the first worldwide standard specifically aimed at IT service management. It describes an integrated set of management processes for the effective delivery of services to the business and its customers. They are now preparing for a Stage II final audit to achieve this prestigious certification by December 2010.

Also during the fourth quarter, NetSol Technologies North America formally launched smartOCI, a SAP compatible multiple catalog search engine at SAP's Sapphire conference which was held in May this year in Orlando, Florida. smartOCI's search engine provides corporate buyers and shoppers with a simple and intuitive user interface to search multiple supply catalogs simultaneously within the SAP SRM application.

In June, NetSol announced that smartOCI was certified by SAP for integration with SAP applications. The SAP Integration and Certification Center certified that smartOCI achieved the highest level of certification with the B2B OCI catalog interface, allowing buying organizations to use smartOCI to search and exchange catalog content from suppliers worldwide and transfer these (inaudible) requests to the SAP and SRM backing systems.

Finally, we retained the RedChip Companies during the fourth quarter to lead our public and Investor Relations program. RedChip has a long history of success in building strong relationships with investors, and we remain confident that they will successfully augment NetSol's Investor Relations and outreach efforts and program.

Going forward, in the wake of the recent floods in Pakistan, we want to reassure our shareholders that these floods have not affected any of our employees or any locations or offices in Pakistan. However, we feel that there will be delays in public sector projects in this country. Our government in Pakistan, contracts in Pakistan are on hold for the time being as the Pakistani government allocates its resources to mitigating the effects of the disaster. Due to NetSol's global footprint, we believe the delay will ultimately have a minimal impact on NetSol's overall business. NetSol operates on five continents and we have numerous organic growth opportunities in both emerging and matured markets.

We continue to pursue new sales opportunities through our joint venture of Atheeb NetSol Saudi Company Ltd. Atheeb NetSol is aggressively bidding in local markets of the Kingdom of Saudi Arabia and other Gulf states as we anticipate traction in this new market for NetSol.

We also plan to further expand our footprint into the impressively growing China market. We will continue to add more sales personnel from the local Chinese market as well as in our other locations. We believe the Chinese market will continue to maintain robust growth, and we intend to increase our market share by selling more licenses to new customers. In the first quarter of fiscal 2011, we signed a contract to implement our NFS credit application processing solution with a major US auto manufacturer in China, giving us over 90% IT market share in China's captive auto finance sector.

Despite the challenging economic times in North America and European markets, we are steadily getting more orders from existing clients in North America and in the UK. This further validates our excellent client relationships and the top-notch service provided to our long-standing customers in both markets.

North American sales of additional licenses and software upgrades for our leaseback solutions increased considerably in the fourth quarter of fiscal 2010. They continue to grow in the current quarter. We also recently signed a lease sub license [upgrade] agreement with Singers Healthcare Finance Ltd., one of the UK's leading providers of leasing solutions to the healthcare industry.

Turning to our product pipeline, we have begun discussion for beta testing our next generation NFS solution with a number of key existing Fortune 500 clients. We have committed our best talents and significant capital in the past three years to develop this solution, which we believe would offer our clients a higher return on their IT investments and allow us to penetrate much larger global markets. The solution is designed to be the premium choice of financial businesses wanting to automate or replace their existing legacy systems. The service oriented architecture of the new system also enables software as a service and the service capability or SAS, which could open new opportunities for NetSol in the future to expand its coverage of the financing industry. In the meantime, we will continue to offer our NFS software (inaudible) a license to our big-ticket customers.

We also are committed to developing our SAP practice further, especially on the back of the great response to our new product offering, smartOCI. During fiscal year 2011, we will commit resources to the continuing development of this promising business.

We're very pleased and excited about our recent successful appraisal or reappraisal for CMM Level 5, maturity Level 5, which places us among a select group of IT companies worldwide. This achievement will serve to improve our long-term credibility in the global IT market and allow us to build greater trust with both potential and existing clients.

We are dedicated to improving our balance sheet and Accounts Receivable collection including net profits through internal cash generation, implementing continued cost controls, and awarding further dilution to our best capabilities. We are confident that these efforts will result in increased shareholder value.

We are most excited about outlook and opportunities we see in most of the markets we operate. I am very proud of the team's -- the team's executing well, both in sales and delivery of systems, to all of our new and regular customers worldwide.

At this time, I'd like to open the call up to our shareholders and interested parties by turning the call back over to the operator for questions.

(Operator Instructions). [Gabe Fassen].

It's actually Mike Vermut for Newland. How are you doing? Great quarter. Two quick questions for you guys. One is you gave us the guidance for the fiscal '11. When you look at the pipeline you're putting out there, the customer base, what do you see over the next three, four, five -- what kind of growth? Could we -- when you're looking at your long-term plan, is this a 20% growing business going out five years, assuming nothing happens in the economy and it's steady? How do you look at your long-term plan?

This is Najeeb and I'll answer (inaudible) question because it involves global sales outlook. My belief is that barring any surprise economic downturn, which I hope won't happen again, following continuous growth patterns [building] primarily because of how our new generation of products, which Naeem and his team (inaudible) really busy deploying, at least demoing to the global customers. So we really see outlook strong to remain, but that's in excess of 20% in the next five years. I'm pretty confident of that. Naeem, do you want to make some comments?

We are actually getting some good critical mass now in the Company. We are approaching $40 million in revenue, and next fiscal, we are projecting $40 million to $45 million or so. So what we are seeing is that NetSol as an organization has a good stream of recurring revenue now as opposed to just relying upon new wins every quarter, every year. We are getting a lot of repeat business from the growing list of clients. So what it does is that it underpins an amount of revenue every year, and then basically any additional business that goes on top.

So we believe, in terms of growth, those ranges we've given, we're comfortable with maybe achieving the top end of the range over the next five years or so. As a product company, we keep adding revenue on maintenance and support as well; that means every license we sell. So we are quite confident we can keep hitting the 10% to 20% range over the next five years.

Excellent. Now, following up on that question, when you look at the sector and the stocks that we look at out there, I'm hard pressed to find a name that's trading at $1 that's going to earn $0.20-plus with a 20%-plus growth trajectory. How do you fend off acquirers out there at these levels? Have you been approached? How do you kind of look at that at these valuations?

Mike, it's Najeeb again, and Naeem, (inaudible) comment if you want to. I think definitely there has been some parties that approached us last year or so. As you know, we've been focused and busy in driving this company forward despite all the challenges. The Company is very undervalued without a question. We have (inaudible) in value and successes of business offering. Other people would like to acquire this company, but I think it has to [go] a lot higher valuation. I'm talking about $8 to $10 range. So we (inaudible) because what we're building is phenomenal, it's a niche business, and it's a unique business model. Naeem, I think you could add some color.

Again, a public company, these valuations that we have now that we are showing profits again, we are potentially attractive to certain players in the market. However, we believe that our story is very compelling and we haven't actually seen anywhere near our potential. So anything that comes to us at these levels, at $1 or so, obviously we're going to resist that. Certainly, anything which is of value to our shareholders we will always take it objectively, again putting personal opinion aside. If somebody comes along with an offer which we believe is of some value but it's not anywhere near where we are, then obviously we have to discuss it. But at this stage, I don't think we will be looking for an offer, where we are.

Well, you keep on operating like this, you'll get there, so don't worry. Thanks guys.

(Operator Instructions). [Bill Matson].

Great quarter. A couple of questions I had -- first of all, I was wondering what sort of an effective tax rate you're going to be looking at for 2011. My other question is I noticed that you started up your share repurchase program in July. I am wondering where you see both basic and diluted shares outstanding going over the next year?

This is Najeeb. Due to the -- (inaudible) in the past, we don't have any immediate issue with -- as we continue to make profit over the tax situation in the US. Also, one of the biggest things we have in [ourselves] is that most of our software [in an exposed] software from the main center of excellence technology campus in North Pakistan. In that country, all exports of IT for at least next six years are tax-free. So I think, in both ways, we are quite exempted until the time when we exhaust those compounded investments. What was the second question again?

The second question was I was curious to see where you saw your shares outstanding going over the next year, both on a basic and on a diluted basis. I noticed that you've got I guess a 2 million share repurchase program that you just initiated. Also, on the other hand, there may be some things that you maybe might be planning on issuing shares to acquire or compensate people or whatever. In kind of flushing out the projection of the $0.15 to $0.20 a share for the year, I'm trying to get a handle on just how many shares we're talking about.

Yes, I thought we believe our estimate is, by the year end of fiscal 2011, we could be at 41 million basic, 40 million basic outstanding, and on a diluted basis, 43 million range, because there's some conversion expected from (inaudible) investors which is already projected in our estimates. And two stock options could be exercised by the officers. I feel the options are in the money for the senior management team and directors, so we expect they will come in and exercise, which is good because these shares are in the hands of long-term committed employees or officers who never sell shares.

So a year from now, 40 -- roughly 40 million basic, 43 million diluted?

By the year-end, yes, by the year fiscal end.

I believe you've already factored in into the APS, yes, for the (technical difficulty) already factored in the fully diluted.

We have taken a conservative look, Naeem, because we want to make sure that, if you exercise the options or the warrant, then we are included in the projection.

Paul Cooney.

Great quarter. Two questions for you just in regards to the share repurchase program. Have you guys started that already? Where are you? How many shares have you bought? How many are left to go to that type of thing?

Well, a good question. We announced in a press release. Two days later we were hit in Pakistan with the most instructive, devastating flooding which really put the country at more like a standstill. So we decided to hold off buying [in an emergency]. Luckily, our company is safe, employees are safe, and then so we will now -- hopefully now the quiet period is over, as you know, we just announced the year-end. Internally, we have about 30 days quiet period that is set by the board the earnings. So now we're in a position to (inaudible) that. Of course, we have a price point in mind (inaudible) when we should step in.

All right. So you haven't started it yet, but you're looking to start it soon?

Yes.

Secondly, now this is going back a little bit and I just -- again, you guys have operated terrifically, especially last quarter. We've had conversations on previous conference calls about -- and I know there is a lot of craziness and Pakistan right now -- about significant Pakistan government contracts being awarded that could have a significant positive impact on you guys, a game changing impact on you guys going forward. That was something I think, because of the political situation, kept getting delayed. Is that something that is dead now, or is that still on the table? What's going on with that?

First of all, we did have a couple of contracts in the fiscal 2010. (inaudible) our service revenue (inaudible) huge insight there in the couple million dollars range. Secondly, these contracts are not dead. I believe the government is in a situation where their first priority is to rescue, rehabilitate and rebuild. There are 20 million people affected in the worst flooding disaster in the modern history. So naturally the government, on top of other issues they've been going through the last many years, so they have to divert most of them and fund to deal with the crisis. So -- but they are not dead, (inaudible) still -- they need to do those things, whether they are defense, whether they're land (inaudible) or whether the other major projects are. We are still in the leading position but unfortunately this natural disaster is something that nobody had anticipated.

Finally, we have intelligently not factored, even in this guidance of 2011, anything to do with these projects. If we can get those projects, then that will be a reason for us to perhaps update or upgrade the guidance.

The last question actually would be just as far as the acquisition of the additional percentage of the Pakistani subsidiary. What is the timing on that? How long will that be? What's going on with that?

We just got -- we informed the shareholders last week; we had a shareholder meeting in (inaudible), and we (inaudible) resolution, so now it's in the SEC Pakistan and the governments back and forth between (inaudible) Pakistan [normal process] and major things from their perspective. So let's hope we can get this thing executed with the next two months. It will definitely impact our EPS because it's a 18% jump in our ownership from 58% to 76% of NetSol Pakistan.

Thanks again, great quarter.

(Operator Instructions). [John Rodstrom].

Congratulations on your quarter. I wanted to ask about your Accounts Receivable. One of the issues that had arisen previously when the markets went south and the economy went bad, you had a large Accounts Receivable. What have you done to correct that and going forward to not have together chase down that money again?

Well, a good question again. I think we have been really active and successful in getting our payments from our key customers. A lot of time, these customers really are big-time because a lot of the big companies have [shown] budgets, so they are, for whatever reason, delaying payments. But the good thing is we have not seen any major bad debt this year, minor at the beginning of the fiscal year. All our teams in each offices are aggressively following and working with our customers. I don't think there is any risk in any significant way for any bad debts or bad provision any further. But we are comfortable that we will continue to get these people going forward. You can see the cash flow improvement in cash in the last 12 months.

One more comment -- I want to congratulate you because, as a shareholder, I thought it was really important that you all stepped in and bought your stock for the family. I thought that was a real sign of the confidence you have in this company, so I want to congratulate you for doing that.

Thank you, and we will continue that effort.

[Daniel Knight]

Congratulations. I joined the call little bit late, so forgive me if the question has been asked before. But I have two related questions. One is what the status of the next generation NetSol suite is. The second related question is you've got a slight increase in tangible assets. I presume that's in process R&D. If you can help me understand when that will begin to decline in the future, that would be great.

I'll let Naeem answer on the new generation, because we did make a comment in our prepared remarks, but Naeem will recap that for you. And then Boo-Ali will step in for the intangibles. Naeem, please?

Yes, the next [generation] product is literally in beta test. We have been conducting a lot of tests internally. We have actually signed our first contract, which we haven't really publicized. We actually signed the first contract for the next generation to a client in China. So it is like our private site, and so it's more than beta. It's in a pilot mode. We should be going live there in December this year. So that will start to get more traction to our sales and marketing effort once we have our first reference site. The product has performed really well in internal testing, and we have started showing it to some key clients which -- where we have more strategic relationships, such as multiple (inaudible) one client like Daimler and Nissan, who are more strategic partners. We've been very careful in showing the product because really it's three years of investment, and we want little to go out in the market in terms of its key strengths. We have to be careful with our competitors as well. So really we are showing it in a way that we feel comfortable who we show it to. It stays under wraps for the time being. We've been very fortunate that we actually managed to get pilot sites, so that will give it more impetus once we are live there. So that's the next generation.

I believe Boo-Ali can tell you when we -- obviously we even added some of the R&D costs. That's probably the way you see the intangible. Boo-Ali, will you shed more color, give us some more color please?

Regarding your second question of increasing (inaudible), this is basically due to the capitalization costs on -- incurred on next-generation product too and on (inaudible) systems which we are expecting to be completed I think by the end of fiscal end of year. Moving forward on the next calendar year, we expect these costs to be amortized.

So you can see amortization in the second half of the next fiscal year.

Okay. And just a follow-up question -- is there a risk that customers may defer buying your product, the current generation products, and wait for the new generation product over the next six months or so?

Naeem?

Actually, that's exactly why we have not gone on the open market with any major marketing effort. Yes, there is some word in the market. Obviously, we're speaking about it now, so it's not totally a secret. But anybody who raises that point, we have really a very strong existing generation product and so they basically can have this product now or they can wait. But nobody (inaudible) companies who want the system now. They have to choose the best of what's available now. So if we're the best of what's available now, we win the business. So we are not losing any business because somebody is going to wait for the next generation because, if they wait, then obviously they are not waiting for the competition. So either way, it's a win-win for us. So we actually are not going to lose a customer who's going to say, well, I'm not going to buy this product and will wait for the next generation, or they are going to just choose this product because it is the best in its class, you know.

So the pricing difference, will the next gen be at a high price point?

This I cannot (inaudible) open forum competitors will pick this right up. Sorry, I can't discuss pricing here.

I'll leave it at that. Thank you very much again.

Bill Matson.

Regarding the increased ownership of the subsidiary in Pakistan, I was wondering first what you saw as the addition to earnings being from that, and also if that accretion has already been reflected in your $0.15 to $0.20 estimate for next year?

No, we have not built in that estimate yet in this EPS projection, simply because it's not complete yet and [to be] confident it will pass from local regulators. I guess, if that happens, which we expect then we may look back and put us in the middle of the year (inaudible) reassess our numbers. If it affects (inaudible) where it is, it should, then we will come back and accordingly update if we need to.

At this point, there are no further questions. I would now like to turn the call back over to Mr. Najeeb Ghauri. Please go ahead.

Thank you. I appreciate it.

In closing, the viability of our business model has never been in question, and we emerge from the market turmoil of the last three years a more efficient and agile company. Demand for enterprise software is expected to increase worldwide as the global economy continues to recover from its downturn and more companies seek to update their technology infrastructure. We will continue to develop our product pipeline, strengthen our operating efficiency, and provide the highest quality of software and support to our clients worldwide. As the key emerging markets for our products and services such as China, Thailand and the Kingdom of Saudi Arabia continue to grow and global IT demand picks up, we look forward to another year of double-digit topline growth and improving profitability in fiscal 2011.

We thank you all for your continued support for NetSol Technologies. Have a good day.

Ladies and gentlemen, this concludes NetSol Technologies first-quarter and fiscal 2010 earnings conference call. Participants who would like to listen to a replay of today's call, please dial 877-870-5176, or 858-384-5517. It will be available until September 22, 2010 at midnight. In addition, a recording of the call will be available on the Company's website at www.NetSoltech.com.

Thank you for your participation. You may now disconnect.