NetSol Technologies Inc (NTWK) 2011 Q2 法說會逐字稿

Welcome to the NetSol Technologies, Inc. second-quarter fiscal 2011 financial results conference call. During today's presentation all participants will be in a listen-only mode. Following the presentation the conference will be open for questions. (Operator Instructions). This conference is being recorded today, Thursday, February 10, 2011. It is now my pleasure to introduce Jon Cunningham, Vice President of Investor Relations for RedChip Companies.

Thank you, Val. Hello, everyone, and thank you for joining us on the NetSol Technologies second-quarter earnings call for the three months ended December 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 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 others -- changes in the general economic and competitive situation, particularly in NetSol's interest, end markets and additional future results and developments could be affected by the financial markets like fluctuations and exchange rates and national and international law, particularly with regard to tax regulations. In addition, any projections us to the Company's future performance represent management's estimates as of today, February 10, 2011. 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 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. Najeeb, please go ahead.

Thank you, Jon, and hello, everyone. I'm pleased to report one of the strongest quarters in our history and thank you for joining us today. The second quarter of fiscal 2011 was highlighted by continued revenue growth, increased profitability and improved margins for NetSol. Demand from both new and repeat customers remained robust in the quarter and our bottom-line also improved as we continued to implement cost management measures and streamline our business processes.

As always our main focus has been our clients' satisfaction as the delivery team worked very hard to deliver every project in time and on budget. Our quality standard initiatives are succeeding and our delivery capabilities are stronger than ever. In short, we believe the upward trend for the past few quarters is not just a trend, but marks a whole new growth stage for our business.

With this being said, I'd like to turn the call over to our CFO, Boo-Ali, to review the Company's financial highlights for the second quarter and first half of fiscal 2011. Boo-Ali?

Thank you, Najeeb, and thank you, everyone, for joining us today. As Najeeb indicated, we are pleased with the year-over-year growth we achieved during the second quarter which marks our fourth consecutive profitable quarter.

For the three-month period ended December 31, 2010 total revenues increased to $10.4 million, up 9.5% year over year and 24.1% sequentially. Net revenues from license fees were $3.1 million, a slight decrease of 5.7% as compared to $3.3 million for the same period a year ago.

Revenues generated from maintenance fees were $2 million, up 13.7% from $1.8 million for the second quarter of fiscal 2010. Revenues generated from services totaled $5.3 million, up 19.3% from $4.4 million for the same period a year ago.

Net income applicable to common shareholders increased to $1.9 million, or $0.04 per diluted share as compared to a net loss of $400,000, or $0.01 per diluted share in the second quarter of fiscal 2010. Operating income increased to $3.9 million, up 139% from operating income of $1.7 million in the second quarter of fiscal 2010.

Gross margin for the quarter increased 430 basis points to 66.5% as compared to 62.2% for the same period a year ago. EBITDA for the three months period totaled $3.2 million, or $0.06 per diluted share as compared to EBITDA of $900,000, or $0.03 per diluted share for the second quarter of fiscal 2010.

For the six months ended December 31, 2010 revenues increased to $18.8 million, up 9.8% year over year from $17.1 million for the first six months of fiscal 2010. As we mentioned in our first-quarter earnings call, quarterly sales traditionally grow stronger as a given fiscal year progresses. So we expect sequential growth in the second half of fiscal 2011 to be stronger than in the first half.

Net revenues from license fees increased 12.5% year over year to $6.6 million as compared to $5.9 million for the same period a year ago. Revenues generated from maintenance fees were $3.7 million, up 2.9% from $3.6 million for the first half of fiscal 2010. Revenues generated from services totaled $8.5 million, up 11% from $7.7 million for the same period a year ago.

Net income applicable to common shareholders increased to $3.5 million, or $0.08 per diluted share as compared to a net loss of $700,000, or a loss of $0.02 per diluted share in the first half of fiscal 2010. Operating income increased to $5.9 million, up from an operating income of $2.8 million in the same period a year ago.

Gross margin increased 630 basis points to 64.5% as compared to 58.2% for the same period a year ago. EBITDA for the six months period totaled $6 million, or $0.13 per diluted share as compared to EBITDA of $2.2 million, or $0.06 per diluted share for the second quarter of fiscal 2010.

The planned acquisition of our European and North American subsidiaries by NetSol Pakistan is still under review by the Securities and Exchange Commission of Pakistan. And our teams are providing responses as needed by the SECP. While NetSol Pakistan shareholders have approved the transaction, SECP is charged with reviewing fairness of the transaction from the perspective of minority shareholders. To date, they have not yet completed their review and provided approval of the transactions.

We remain fully committed to building shareholder value by strengthening our balance sheet, enhancing the profitability, improving accounts receivable collection, implementing continued cost controls and avoiding further dilution to the best of our abilities. As of today the Company has 51.1 million outstanding shares and around 1 million outstanding warrants.

In addition to it, 7.8 million in revised options are also outstanding at a strike price ranging between $0.65 to $5. (technical difficulty) maintain our previously stated guidance for fiscal 2011 projecting revenues of $40 million to $44 million and earnings of $0.15 to $0.20 per share. At this point I'll turn the call back over to Najeeb to discuss our business highlights for the most recent quarter. Najeeb?

Thank you, Boo-Ali. During the quarter -- second quarter we saw strong sales to new customers as well as repeat business from existing customers. But going beyond that, we made noteworthy progress on key business and product development initiatives that we expect will have a long-term positive impact on the growth of our business.

In the quarter we successfully completed further testing of our smartOCI search engine with Fortune 500 SAP clients and received the highest level of SAP certification for smartOCI. Development work on this product is now nearing completion and we have already received keen interest from several Fortune 500 companies.

We also announced our participation in the SAP EcoHub solution marketplace, a community powered solution marketplace that makes it easier for customers to discover, evaluate and buy partner solutions, including smartOCI, that complement SAP applications. We are building our alliance with SAP and the senior management team and we have a plan in place to expand our NFS solution marketing in the global and US marketplace through our growing relationship with SAP.

The highlight of Q2 was signing a contract worth $2 million with the capital finance arm of a major auto company in China to implement our entire NFS solution. The client company, which is a joint venture between two major Asian auto manufacturers, selected our solution, NFS (inaudible) to manage all of its finance operations.

Also during the second quarter we signed a strategic agreement with SANY, SANY Auto Finance Company Limited, one of the top 20 machinery equipment manufacturers in the world, for enhanced financial solutions and IT services. In addition, if SANY enters any international markets as a captive finance company, NetSol will be the preferred system vendor.

We also completed the delivery of a management information system to the Punjab Rural Support Program to facilitate management of the micro-finance operations of this government project in Punjab, province of Punjab in Pakistan.

In December we participated in an event with our Middle East partner, Atheeb Group Limited, to officially launch our Atheeb NetSol joint venture. The event showcased Atheeb NetSol's product offerings to an audience including executives from Saudi Arabia's financial, telecommunications and defense industries. Atheeb NetSol also exhibited at the Kingdom Healthcare Expansion and Investment Summit in Saudi Arabia later that month.

Also during the quarter we sold additional leaseback enhancements and services to two Fortune 500 clients in North America -- the finance arm of a large automotive manufacturing company in the United States and a financing subsidiary of one of the largest IT network (inaudible) manufacturers in the world.

In Europe we implemented LeaseSoft upgrades for BNP Paribas BV, the largest bank in the euro zone by deposits and UK-based Aldermore Bank. We also received two prestigious Teradata National IT Excellence awards during the quarter, an Excellence in Software expert award and a [CIO] of the Year award.

More recently we achieved ISO 20,000 certification, the foremost IT services management standard in the world. NetSol is Pakistan's first and only ISO 20,000 certified company. Our teams worldwide work tirelessly to deliver the highest caliber of products and services and we are very proud that their efforts continue to be recognized.

For the remainder of the fiscal year we plan to continue building upon our strong foundation in China, which has become the world's second-largest economy after the United States. In line with our strategy to strengthen our organizational presence in China, we are working towards forming a wholly-owned subsidiary in China which will boost our local presence and enable our participation in the growing banking, big-ticket leasing and equipment rental sectors in China.

We anticipate further penetration by NetSol into China's burgeoning capital leasing and finance market where we currently have a large majority of the IT market share. We expect the establishment of the new subsidiary to be completed by the end of fiscal 2011. As part of our growth in China we foresee the need to hire local resources, as well as manage more frequent travel of our technical resources and management to the region.

In view of the anticipated growth of our China team, expanding operations and the planned upgrade for our legal status as a country, we have decided to enhance our office space as well. Accordingly, by March 2011 our office in Beijing, China will shift to a facility that is three times larger than the current space to accommodate expected growth. We're confident that these investments into expanding our China presence will increase our market share tremendously.

While continuing to strengthen our market leading position among large-size auto finance clients, we plan to expand our reach to other local segments in China through a special set of product features -- suited to medium-size clients. This should allow us to increase our business activity while reducing implementation lead-times.

Outside of China we continue to see strong business leads and opportunities in other parts of the world, including Thailand, the US, Saudi Arabia and Latin America. In Thailand, too, we have upgraded our office and strengthened our team and are already beginning to see an impressive pipeline.

Saudi Arabia is a new market to us, but a very promising one in which we are already exploring several opportunities. In the US we are building a renewed interest from our existing clients and our new product features and technology. Last but not least, Latin America shows great potential with us with rapidly increasing leasing penetration. With technology development in the region we see huge potential for tapping the market.

With our increased business activity in China and elsewhere in the world we are providing a growing number of product demos to strong prospective clients. In light of this increased activity and our expectation of further business growth we have already started investing in our technical resources through further hiring and training.

During the most recent quarter ended December 31, 2010 the number of technical employees at our Lahore global delivery center grew from 585 to over 600. This included an increase in our NFS technical team from 160 to close to 180 employees supporting the NFS delivery.

Our extended innovation joint venture with the innovation group means we remain successful and buoyant. We currently have a sustained level of activity with 100 plus billable employees and we expect this number to grow significantly during the coming year.

As you can see, we're expanding in line with our business growth and with that of the market. Just this week the [search] from Gartner Group projected that the global enterprise software market will increase by 7.5% in 2011 to surpass $253 billion. Today there are plenty of (inaudible) to capture new business in the coming months and years.

With our aggressive marketing activities and consistent improved fundamentals our stock price is experiencing much higher trading volume having grown exponentially in the last few months compared to the same period last year with price appreciation nicely.

We believe that the market is just beginning to recognize the true value of what we have built and we remain very bullish in our long-term outlook. At this time I'd like to open the call to our shareholders and interested parties to ask any questions. Operator, please facilitate. Thank you.

(Operator Instructions). [Ronnie Gold], Heart of New York.

Hi, I would like to know, regarding future guidance for the Company and just watching the stock reaction, wonder why you had such a great quarter, why that would be the case? I know you're not responsible for that, however it's just a question.

Thank you. We have, as you know, given the guidance which we have reiterated, as Boo-Ali had just mentioned, of $40 million to $44 million top line and EPS of $0.15 to $0.20. That will be a strong improvement from fiscal 2010 period. Also our growth strategy, as we just discussed with you, we're quite excited about the expansion in our Asia-Pacific, (inaudible) China and Thailand markets. And they will highlight all the activity in the pipeline and backlog.

But we are really encouraged by the progress we've made thus far. And I believe the Company has an amazing product line and a vision to execute to really make it a more successful enterprise in our space. And anything you'd want to add further on the guidance and the pipeline?

Yes.

Just to reiterate that the stock won't always react in a way that we expect it to or hope for it to. We believe the numbers are strong, the quarter is strong and we believe the year is tracking really well. We are tracking the guidance really well. If there is any reason why we should upgrade the guidance we will, but for the time being we are maintaining it so that should be enough reason for the stock to hold or improve the way we are.

Okay, thank you.

(Operator Instructions). Bill Matson, RedChip Companies.

Hi, congratulations. Great quarter.

Thank you.

I had two questions basically. First, I was interested in getting some guidance as far as where you believe your shares outstanding will be going as of the end of Q3 and Q4, and also out into the future, to the extent that you can project. That's question one.

And question two is that I see NetSol basically in two parts. I see your ongoing core business as one part and then there are these opportunities that you have in Pakistan and Saudi Arabia, things that could be really huge, as being another part. I know that's hard to project, but as far as your core business goes, if you could give me some guidance as to the sort of growth that you see as far out as you can project it, just talking about the core business, that would be great.

Sure. I'll let Naeem step in to talk about the core business because he's Head of our Global Sales, basically with NFS. And then Boo-Ali will help in giving you an accurate picture on the shares outstanding.

Yes, I mean the core business really at the moment is on a very strong footing. As you can see, quarter on quarter we are putting on better and better numbers. Our markets in Asia are very, very strong. Markets in the US are, as you can see from the macro picture in terms of the economy, things are still not quite there in terms of growth. Europe is sort of similar, a little bit lethargic.

But I see opportunities for NetSol in the emerging markets are really -- we are right in the sweet spot of those opportunities having the kind of client base and the product offerings that we have, we really believe the next year or so is going to be quite a strong growth pattern for NetSol continuing to sell more licenses as we introduce more product, new product. We believe that these are going to enhance earnings and enhance revenue. So for the core business limit reiterate that we are very bullish, feel very strong on where we're going.

Also in addition to your second question about Middle East, I think as I mentioned in my prepared remarks, our partnership with Saudi Arabia is quite significant in terms of their presence of a (inaudible) in the very rich and a growing market. Because Saudi's are investing billions in different sectors like public sector education, healthcare, IT, banking, infrastructure and so forth.

I believe our partnership is in a way much more significant because -- Atheeb didn't have an IT partner because they bid in many diversified projects throughout the kingdom and the neighboring countries. So in that respect we are building a pipeline and participating in key projects. I believe it's a matter of time, but we are very bullish on the outlook there.

And I think even in the region I believe there is opportunity in like the Middle East or Abu Dhabi and UAE. Those markets are very bullish in terms of growth opportunities and that puts us in a pretty good position with our partnership. And then now I'll have Boo give you a little bit more information on the shares outstanding. Boo, do you want to help us, please?

Yes. Regarding your first question of outstanding number of shares, as I have already said, as of today we have around 51.1 million outstanding shares and around 1 million outstanding warrants. Besides these, around 7.8 million of shares are also outstanding, but the strike price ranges between $0.65 to $5.

We're not sure how many options will be exercised by the employees because the price range is quite high and right now the share is trading at around $2 and the price ranges between $0.65 to $5. So we're not sure how many options will be exercised by the end of this fiscal year; however, we are expecting total diluted shares to be around 55 million by the end of this fiscal year.

Just to recap, he's saying the total shares could be 55 million by the fiscal year-end 2011. That's probably the high side. And I believe, just to recap, the warrants are pretty much exhausted by the investors in the last 12-month period and there's very little left in terms of the further conversion in the remaining fiscal year. Operator, next question please.

Daniel Nye, CIM Investment Management.

Hi, gentlemen, how are you doing? Just a few questions on your cash flow statement. So perhaps that's directed to Boo. The first question I have is the increase in intangible assets is a $3.1 million spend. I presume that's for your next-generation suite of products. Can you tell me when that spend will begin to decline? And secondly, where are we with the second-generation product?

I think, Daniel, that Boo will help you with the first part and Naeem will give you a bit more up to date on where we are with the new generation, okay?

Okay.

Yes, the increase is basically we are investing in -- as you know, investment expectations are hard to predict and it is still in the development stage. Right now one more deal of the product has been completed and we have started amortizing it from 1st of December 2010. However, the remaining two modules of WSS and [CMM] are still under development and we are expecting these two modules to be completed within this calendar year, 2011.

Yes. Naeem, do you want to give a little bit more -- shed a light on where we are with the R2? Hello? Naeem, are you there? Anyway, basically guys, Daniel, what I'll say is that we are, as Boo-Ali said -- mentioned, the two modules are the CMM, which is the main application in development, is under the middle of the stage of completion and we believe by fiscal year-end we should be in pretty good shape to market this thing openly.

Right now we've been seeing a lot of interest with some selected global customers that we have, the interest has been quite high and we've done a lot of demos and workshops. So we've seen how serious they are in taking this global application for their customer base. So I think we're quite excited about the opportunity for the development and how it will help our growth strategy going forward and even in 2012 and onward.

Okay, so you're not going to market it until the end of the fiscal year then, (multiple speakers)?

(multiple speakers) soft marketing the last few months just to see the acceptance of the key customers and we've seen tremendous response. Actually we're quite encouraged. So as a result we've now accelerated the development stage of the final solution which is the most complicated, the CMM, which is a pretty huge application.

So I believe we have one sale, as you know, with GMAC China Auto Finance and that has been implemented successfully. But others are really falling through and the sales team (inaudible) really busy in fielding the demos and growing further -- how soon we can complete this development.

Okay. So how much are you budgeting to get to completion from here?

I think Boo-Ali can (multiple speakers).

I can jump in if you need more (multiple speakers).

(Inaudible).

Daniel, and the development is literally in beta phase and we have one client who has already tested in China who has taken one of the major core modules. So it's performing very strongly. And so we believe the majority are indeed -- is already done. We see incremental investment in (inaudible) adding features and so on, but the core development, which I would say is 80% of the product.

Enhancements are never ending, as you can imagine, with any IP -- any product. So we see that continuing over the years. But I think there is a budget we're going to allocate in the year to enhancing the product, but certainly the core development is more or less that.

But was it $3 million every six months? Is that what we need to forecast?

I cannot tell you that. I don't know if Boo-Ali can, but I can tell that that seems like a big number to me going forward. It might have been in the past, but that probably is going to be a little bit on the lower side than that.

That will be around $2 million to $2.5 million or so.

Okay, (multiple speakers). I have another question -- and I've got a few more questions, but I'll ask my second question, then I'll jump off so someone else can ask questions. There's a line here for proceeds from the sale of common stock for $2.6 million. Can you let me know when this offering was made, the pricing of the offering and let me know the date of the release because I didn't see it on any press releases?

This was -- I believe you're referring to back in I believe September or October. It was a private placement through investors who've already been investing from time to time. And these were restricted shares six-month restrictions and they were disclosed -- it is disclosed in the current quarter.

In this quarter. And what is the pricing of the offering?

I think it was $0.65, yes. It was back in October or September, right? September (inaudible) $0.65.

Sorry, $0.55 or $0.65?

(Inaudible) five.

$0.55? You're breaking up.

No, no. $0.65, 6-5.

$0.65. And were the warrants attached?

No, no warrants.

Okay. All right, (multiple speakers). Okay, gentlemen, thank you. I'll let someone else ask a question, but I'll jump back in a little bit if I get a chance. Thank you. Bye.

(Operator Instructions). Bill Garrison, private investor.

Yes, thank you. Najeeb, or anyone else, could you provide an update on your headcount these days and any thoughts on that going forward over the next couple quarters?

I have that -- and, Boo, you also can validate. We have actually hired more people in the last three months. The total was up to about 802 from close to 740 -- or 760 rather, in Q1 period. Most of this new hiring was done in NFS related in Lahore.

In China we've added some more local Chinese and a few in our Bangkok office. So basically the trend is that we are -- we have backlog, we're growing our delivery capability, particularly in the new generation phase.

Also the current (inaudible) [is really] -- we've seen more maintenance income and more enhancement orders throughout the Company. So that's causing us to hire more people because they are already billable. And of course in China we're aggressively hiring the local both in technology-related and sales and marketing-related. So it's gone up to almost 802 from 760 in the last three months.

And what are you experiencing in terms of wage inflation in Lahore?

Well, quite frankly, although inflation is higher we're still very competitive with other emerging markets such as India and China. Without a doubt we have a much different cost structure, for example, infrastructure and of course the wages -- it's slightly higher. But definitely we still have a huge advantage compared to our next-door, India.

Also we still have six years remaining on the tax holiday for the IT export. So that is pretty -- a big incentive for NetSol and companies who are exporting IT services and products from that region.

Okay. And lastly, are you transferring some cost from California to Pakistan and where are you in those efforts?

Yes, we actually -- I don't know how long you've been supporting this stock, but two years ago we implemented our global delivery model which basically integrated our development capability in the Alameda office and of course in London, Horsham to Lahore. So what we've done is best shoring model which Naeem can further shed light on because we have effectively leveraged both resources in Lahore to support our customers in the US.

At the same time we have some staff in the Alameda office to support face-to-face our customers and of course new customers. It's been very effective because that's how it shows the improved gross margins to what 66% this quarter. It's a reflection of how we manage the global delivery model.

Okay. And so that process is pretty much complete at this point?

Well, it's an ongoing thing. We always look for the best way to leverage our cost and use the cost arbitrage, yes.

Okay, thank you.

[Shabu Parisi], EMB Global.

Hi guys. Three quick questions which if you could just comment on. One, if you could give any more color just with respect to the framework agreement with SANY. And is this sort of where they have a plan to over a number of years get bigger so that's really a very long-term multi-year plan? Or is it more really where they have quite near-term objectives for rolling out different worldwide operations? So just if you could give a comment on that.

Second question, just if you could comment on Pakistan, whether you are seeing a little bit more activity. You had previously commented that not much was going on there because of the various problems in terms of getting contracts (inaudible). And so just a question if that's improving.

And the last question -- I'm sorry to lump them in together, but that's hopefully more efficient -- is just on the -- you've noted I think for a couple of quarters you're hoping to ramp up the US business. And if you can comment a little bit on how that's going and what types of business you're really trying to chase in the US, that would be helpful. Thanks very much.

Thank you, Shabu. I think, Naeem, you're our expert on the SANY relationship. Do you want to give -- shed some light here and then we can cover the Pakistan section?

Yes, the SANY ship is really a -- if you like, a long-term strategic relationship where they're aggressively looking at opportunities because the main business is export -- their hardware into the more developed world. They have huge cost advantages in China and they are competing against some very large players in the US and in Europe. So really their strategy is to go out into the developed world and open subsidiaries for finance as well as their sales and marketing organization.

So our agreement is that when they go into a new market the software, first choice software is our platform and that gives us a distinct advantage as and when they expand. We cannot divulge at this stage their business plans because, again, we are under (inaudible) with them and it's sort of -- it's a very competitive environment.

So all I can say to you is that it's quite a strong development for us to be associated with a company of that size and for them to validate our platform as the one they want to take global. So it's quite satisfying and it's very similar to what Daimler has done. As you know, we are in 13 countries with them now. So it's the kind of relationship that will grow organically over the years and underpins a lot of our (inaudible) for the future.

Shabu, do you have a question about Pakistan public-sector? I believe although it's an improvement there, because we are participating back again in some new local projects which is a very positive sign. But we've not even, until today we've not factored any numbers in a major way, but we believe that when they realize in a significant size of revenue they will be required to come back and hopefully upgrade that (inaudible) and leave both top and bottom lines.

But for now we are active, we are busy, we have scaled down the staff in that group -- much more leaner and much more in efficient. However, the opportunities are coming, especially in the province of Punjab which is the most active province in the country. So I think we are encouraged, but I would not give any number at this stage. Again, as they become reality then we'll come back and we'll report accordingly.

Okay, thanks very much. And just comments on US business in terms of the plan to expand business in the US? (multiple speakers)

Go on and then go ahead.

Shabu, in the US I really want to underpin our plan there is going to be our next generation product which is, as I said before, is going through beta testing with a couple of clients. And the US we believe is going to be just about ready by the time we launch the product there.

So we don't want to be too early in the game and spend a lot of marketing dollars before the market recovers. So we're starting to see some activity, one or two companies are starting to look at our stock and curious about changing their platforms. But certainly by the time we hope the recovery is well underway that our platform is ready for a full launch.

So I see that as a six- to nine-month lead-time in the US from today before we actually launch the product. And then we hope that that coincides in time well with the recovery there and we'll be able to go quite aggressively in the market to promote the product.

Okay, thanks very much.

Gabe Fassen, Newland Capital.

Hi guys, it's actually Mike. How are you doing?

Thank you, Mike. How are you?

Good. A quick question. When you look at the growth rate, so 10% or so in this quarter, and you look at the new suite introduction and the pipeline, what kind of growth should we expect going forward? I'm not trying to get a forecast, but when you look at the rest of this year into next year should we see acceleration on the growth side?

Yes, as historically it's been our trend that the second half accelerates much faster than the first half. And of course we have reported a pretty strong Q2. Of course your question is valid that are we going to be able to meet our guidance, of course? I believe we will, quite confident.

And Naeem mentioned, based on the pipeline and all the activity we have in China and other markets, are quite excited about the growth outlook and we definitely will look to grow the revenue stronger in the second half than the first half. I'm sure, Naeem, you want to add more color if I missed anything?

Yes, really for us what is underpinning the guidance is the backlog. We've already developed a very nice backlog and I probably, if I look back three years, I would say this would be our strongest backlog in a long time. We have a number of very large projects which are under way and a lot of the revenue seems to come. So we believe that it's going to help us get most of the guidance through.

So -- then there is definitely some incremental new wins over the next few quarters that we also believe could go on top. So essentially we're very confident on the guidance. And growth wise, we are still a growth company in the space we are in. The opportunities are limitless for us. We believe we haven't scratched the surface here yet because, if you look at where leasing is in the emerging market, the penetrations are very, very low as opposed to the developed market.

In China the penetration is less than 10%. In the US penetration is more than 60%. So you can see where China is going to go. If you look at China and some of the other economies there where leasing and finance is still a relatively new space, we believe that we have barely scratched the surface in those markets as opposed to the mature markets.

So we see tremendous growth opportunities for NetSol. If we can execute on our product strategy, if we can execute on our sales and marketing I believe the markets are there. I believe the revenues, the business is there. It's a question of getting the product out there and a question of marketing it right and selling it right, pricing it right, delivering it -- all of those things, that's our responsibility to execute on, but I believe the market is certainly there for a company like NetSol to leverage in the space that we're in.

Mike, further to just add a couple more points. In terms of our bottom line, as our margins -- we've seen gross margin improved from 52% to 55% and we believe that it will continue to improve to a high 60% to 70% level. With the revenue growth I believe the bottom line will be healthy and stronger and that's what we're focusing on as we manage our business in a way that is much more efficient and productive in terms of productivity level.

And with the quality standards that we have introduced all the time, it is really helping us working through the system that we can improve our net margins quite aggressively. So I'm pretty encouraged by the trend and we believe that we'll have very impressive year-end numbers.

Excellent. That's the point I was trying to get to is that if you start seeing (inaudible) trying to look at the long-term growth trajectory of the Company, if it's a 20% grower and you can get up to the 70% type margin or just on the inflection of that bottom line ramp I would expect.

Absolutely.

Is that how you're looking at it?

Yes, yes, absolutely. I think we have really, as you've seen, we've come very far from the last two years in terms of all the global challenges. But this Company is really positioned lean and mean and we hire only when we see opportunities to keep those employees busy in all the markets.

I don't think we have one extra body in this Company, seriously. So I think this will really help us improve both growth and net margins and that's exactly what we want to try to create, real shareholder value. And as you know, we continue to invest ourselves because we believe a very strong outlook for the Company in every way in every market.

Excellent. Thank you very much.

Operator, any more questions?

There are no further questions, sir.

Well, thank you. I appreciate you doing the call. In closing, NetSol continues to gain traction in emerging and developed markets, a global footprint in China, pilot in the US, the UK, Australia, the Middle East and Pakistan, coupled with our successful track record gives us a clear market advantage in every corner of the globe.

We are a unique company that has created a high end-to-end quality solution with a technology edge and a cost advantage that is second to none to meet the demand of our multi-billion dollar companies and industries worldwide. We enter the second half of fiscal 2011 tremendously optimistic about the growth opportunities that lie ahead. We thank you for your continued support in NetSol Technologies.

Thank you. Ladies and gentlemen, that does conclude today's conference call. Thank you for your participation. You may now disconnect.