NetSol Technologies Inc (NTWK) 2012 Q1 法說會逐字稿

Ladies and gentleman, thank you for standing by. Welcome to the NetSol Technologies first-quarter fiscal 2012 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, Tuesday, November 8, 2011.

I would now like to turn the conference over to Patti McGlasson, General Counsel of NetSol Technologies. Please go ahead ma'am.

Thank you for joining us today to discuss NetSol Technologies' fiscal 2012 first-quarter results. On the call today are Najeeb Ghauri, Chairman and Chief Executive Officer, Boo-Ali Siddiqui, Chief Financial Officer, and Naeem Ghauri, President of the Americas and Europe.

Following a review of the Company's business highlights and financial results, we will open the call up for questions.

I'd like to remind you that today's call is being webcast at www.NetSoltech.com. A playback will be available for one week and may be accessed on the Internet at NetSol's website.

Additionally, all of the information discussed on today's call is covered in the Safe Harbor provisions of the Litigation Reform Act. The Company's discussion may include forward-looking information reflecting management current forecast of certain aspects of the Company's future and our results could differ materially from those stated or implied.

With that said, let me now turn the call over to Najeeb Ghauri. Najeeb?

Thank you, Patti. Thank you everyone for joining us today. It is a pleasure to be speaking to you today from our offices in Lahore, Pakistan.

Our fiscal 2012 first quarter was a challenging yet transitional quarter for NetSol. It was transitional because I believe we reached the rock bottom of a very difficult period that surfaced, as you may recall, in the fourth quarter of our last fiscal year.

From a financial performance perspective, NetSol's first-quarter results were nowhere near where we would like to see them. The global economic environment continues to extend the sale cycle as customers work through their own spending decisions. That being said, geopolitical pressures have eased and that bodes well for all of our product offerings, particularly NetSol's next-generation NFS product which has already received tremendous interest from several new and existing customers despite a longer-than-expected decision-making cycle. Our pipeline remains strong with 50-plus leads in most of our markets for NetSol Core Solutions at the end of the first quarter for fiscal 2012. I would like to note that we anticipate sequential revenue growth of 15% to 20% between the first and second quarter of fiscal 2012.

Before taking a closer look at NetSol's first quarter and the Company's direction for the year as a whole, I would like to review several recent business activities that are helping us lay the groundwork of future performance. The formation of our US-based e-commerce division, Vroozi, which provides a dedicated sales and delivery channel for NetSol's smartOCI product line, in addition to developing next-generation e-commerce and search engine technologies.

Also, we have formalized our joint venture agreement with Brasilinvest Group, a business development company that serves as a merchant bank to some of the largest companies in South America. As part of the joint venture, NetSol will be able to leverage Brasilinvest relationships and gain access to a potentially lucrative marketplace for the Company's NFS solution, and lawyers from both sides are busy in formalizing the joint venture entity in Brazil and is expected to be operational by the beginning of January 2012.

Also, we signed agreements with several companies, including a Fortune 500 aerospace defense contractor and one of the leading chip makers to implement our smartOCI software. The software allows companies to access their global suppliers and retrieve competitive price information to meet their purchasing requirements as well as collaborate with their suppliers to exchange and publish catalog content. We see excellent potential in this new revenue stream and expect to recognize sales in the coming quarters. The potential new leads in North America and Europe has grown to over 20 just in the last quarter alone.

Now, looking at our Asia-Pacific region, we signed a multimillion dollar agreement to implement the NetSol Financial Suite, our NFS solution, which includes retail platform for a company that will provide auto financing services throughout China. We also have been seeing growing interest from current and new customers on our next generation of NFS as we address the changes in enhancements from GMAC China and two [other] clients.

Finally in Europe, we announced last month that we jointly acquired in the UK a UK-based Virtual Lease Services, Ltd. Together with Investec Asset Finance Bank, the acquisition enables us to leverage our deep business [process] knowledge and systems capabilities to expand our offerings throughout the region. All of these new initiatives support our long-term objective to strengthen and diversify NetSol's global footprint.

Unfortunately, an unsettled global economic climate and certain geopolitical pressures have affected short-term results. Nevertheless, I want to assure you that we are committed and focused on continuing to deliver the high-quality solutions that customers associate with the NetSol brand. The confidence and morale of our team from Lahore to Los Angeles and from London to Bangkok runs very high. We are very excited about the process ahead and I will provide more detail later on the call -- today's call about how we intend to navigate through this challenging period. But for doing so, I would like to turn the call over to NetSol's CFO, Mr. Boo-Ali Siddiqui, to review the Company's financial results for the first quarter. Boo-Ali?

Thank you, Najeeb.

The challenges that we encountered in the fourth quarter of fiscal 2011 continue to weigh on the Company's performance for the first quarter of fiscal 2012. However, I would like to note that the first half of the year is historically a softer period due to normal seasonality.

Revenues for the first quarter fiscal 2012 total to $6.2 million compared with $8.4 million for the same period a year ago. First-quarter license fee revenue were $1.1 million compared with $3.5 million in fiscal 2011. The decrease in license revenue is merely due to the effects of geopolitical pressures and a sluggish global economy. We remain confident that our licensing fee will improve as the year progresses.

We reported a first-quarter net loss attributable to common shareholders of $1.5 million, or $0.03 per share, compared with a net income of $1.6 million, or $0.04 per diluted share, for the same period last year.

Total operating expenses for the first quarter of fiscal 2012 declined by $200,000 to $3 million. We have committed to continue reducing operating expenses for the remainder of fiscal 2012. Our first-quarter operating loss was approximately $836,000 compared with operating costs of $2 [billion] in the same period in fiscal 2011.

As Najeeb stated earlier, we anticipate sequential revenue growth of 15% to 20% within the first and second quarter of fiscal 2012. We also expect to see our bottom line improve in the second quarter, but I am not providing any further guidance due to the challenges of forecasting in this economic environment.

I would now like to turn the call back over to Najeeb to provide more details on the road ahead and how we plan to (inaudible) foundation and enhance the Company's performance. Najeeb?

Thank you, Boo-Ali.

At NetSol, we continue to see evidence of positive change and ramped up interest in the current quarter. This gives us confidence in the Company's performance for the balance of fiscal 2012, but we are not satisfied and have accelerated our efforts and made new strategic decisions to seek out options that will make NetSol even stronger and ensure that we are ready to seize growth opportunities when they present themselves.

Last month, we filed a Form S-3 shelf registration statement with the Securities and Exchange Commission that allows access to growth capital. This will provide a comfort factor to our much (inaudible) [declines] and [progress bases] and enable NetSol to qualify for high-value NFS and services contracts.

We have no immediate plan to raise any capital at the current price levels. Our first priority is to meet the $1.01 minimum bid requirement to maintain our NASDAQ listing.

Even in these uncertain global economic times, a shelf registration statement is a common method used by both small-cap and the large-cap companies in order to be ready to act quickly on opportunities.

We as fellow shareholders strive to see the Company maximize its growth potential and the shelf provides NetSol with the ability to achieve growth objectives and fund strategic initiatives, including mergers and acquisitions, infrastructure investments, as well as further develop the expansion plan in Asia-Pacific, North America, Europe, and Brazil. The potential access to these funds also opens the door to business opportunities that otherwise would have remained off-limits to a company of our size as we attempt to forge new relationships and gain competitive advantage over industry heavyweights.

Additionally, we announced a share repurchase program today. In our opinion, NetSol business was considerably more than the current value of its shares. The repurchase is capped at 2.5 million shares and we believe that it demonstrates our confidence and enthusiasm for the Company, in addition to helping improve shareholder value. The amount of purchases will depend upon market activity and the levels of available deployable cash.

I'd now like to provide a roadmap that demonstrates how we plan to continue to cultivate near and long-term growth in North America, Asia-Pacific, Europe, and Brazil. In North America, the huge market presents a significant opportunity across NetSol delivery channels, (inaudible) among the most promising delivery channel is software as a service, or the SaaS model. Typically, this model applies to what is commonly referred to as the cloud, which is, in non-technical speak, is information [base] hosted on the Internet. The software industry and customers alike are excited about the cloud because it reduces the need for costly hardware and also promotes the use of a fully integrated centrally located, web-based management system that enables us to service customers efficiently around the world.

We recently introduced our cloud delivered leasing and finance solution at the Equipment and Leasing Finance Association conference in San Antonio, Texas and the National Equipment [Financial] Association Expo in New Jersey. I am pleased to report that we had very strong reception at both events. The NetSol name is well known in the leasing and finance business, but what sets us apart is that we now offer customers the first cloud delivered leasing and finance product of its kind, known as our LeasePak-SaaS product. We are really excited about this new direction for NetSol (inaudible) as customers continue to look for an affordable alternative to traditional license-based systems. Despite the recent introduction of this service, we already have seen over 15 active leads for LeasePak-SaaS. Please expect to hear more about progress on this front in the year ahead.

Now moving to Asia-Pacific region, China and India are our two important powerhouse markets for NetSol. The auto financing industry is still in its infancy in these regions, and we have a tremendous opportunity because we are already actively doing business there. (inaudible) [Financial] Services in India went live with NetSol state of the art NetSol Financial Suite application in July 2011, and this relationship laid the groundwork for future partnerships in the region.

Our NetSol NFS solution is well entrenched in China, working with such industry (inaudible) as Daimler, Nissan, Toyota and GMAC China. We are focused on continuing to establish the new relationships as well as seeking out additional opportunities with existing customers. Continuing to market our products on this region will prove critical as you further strengthen NetSol's APAC presence.

I'd like to note that Forbes issue recently identified NetSol as one of the best companies in the region that is under $1 billion in annual revenues. Well, that's 4% Europe. We continue to sign agreements for our LeaseSoft software, including the full integration with the Europe -- Europe (inaudible) [searches and seems] to provide an (inaudible) data accuracy and better informed carriers' decisions. These agreements are the bread and butter of our business in Europe. Whether the customer is a major bank or an independent leasing and auto finance company, we will continue to mine for opportunities for our legacy business.

But perhaps the newest and most exciting direction in NetSol Europe are the opportunities that abound with smartOCI which is beginning to gain traction much like it is in North America. SmartOCI is driven in Europe through channel partners, and we are currently checking eight leads that are in various stages of qualification. [At least more than] leads is expected to close in the third quarter.

We are also in advanced discussions (inaudible) defines them as general partner that will provide access to a major electronics company. We are delighted by the renewed interest in smartOCI and look forward to keeping you posted about our progress.

In Brazil, our initiative in Brazil, which continues to represent a significant opportunity for net growth, has the second largest economy in (inaudible) and the rest of the hemisphere [that] this is well-positioned to partner and service a number of burgeoning sectors in the region, including financial services, oil, energy, and transportation. Our partnership with Brazilinvest Group provides a platform that would normally take years to cultivate. But because of the relationship, we have gained access to some of the most influential decision-makers in the region. We're actively pursuing business opportunities for our legacy NSF solution in addition to exploring relationships with smartOCI. Once the entity is formalized in Brazil, we would be able to go after these leads in both products and service sectors of this burgeoning emerging market in Latin America.

In conclusion, as you can see, there is a lot of positive exciting activity going on at NetSol. Our goal is to continue to navigate global economic conditions and further cultivate growth opportunities in North America, Asia Pacific, China, and Brazil. We cannot control the volatility in the global economy, but we will continue to provide our customers with the highest-quality solutions around the world.

With that, I would now like to open the call for the questions and then I will make some closing comments. Operator, please help us with the questions.

(Operator Instructions). Daniel Nye, CIM Investment Management.

Daniel Nye Just one big question for you on the cost side. I'm looking at your income statement and your operating expenses, your total cost of revenues rose about 28% and your sales and marketing rose about 45% despite your license revenues coming back this quarter. Can you explain why those costs rose so much and what your plan is in the next couple of quarters for those costs?

Thank you. I will ask Boo-Ali to jump in.

Daniel, your question is why [have] sales expenses have gone up? What is the (inaudible), right?

Why your operating expenses and sales and marketing expenses rose so much despite --

I can answer the question. I believe that we've made some new hires in both sales and marketing in the last quarter as a result of expansion, as you've seen our presence, growing presence in Bangkok and adding more people in China. Additionally, we hired some a few more salespeople in the North American market. I believe although the sales were down the last few quarters, we've been hiring people to basically globally expand our business offering.

What is the period of time between hiring someone and that person developing reasonable revenues to support their costs?

Najeeb, I will pick it up.

Yes, go ahead.

Sales costs are always frontloaded and as you've seen the pipeline develop, you know we can ill-afford to reduce our sales exposure because that's the only way really we'll see a turnaround in the coming quarters. So what we are doing essentially is making sure that, if there is opportunity in Asia-Pacific, that we go after it. So we have really redoubled our sales and marketing effort and we'll start to see results in the coming quarters.

As Najeeb already explained, the pipeline is strong, remain strong because we do keep our coverage on sales side going despite sales being down. We try and concentrate on reducing costs operationally in the back office rather than on the customer-facing side.

I understand. Sorry, just a related question. What do orders look like for this existing quarter? Do you have a decent pipeline and do you expect license revenues to come back in this quarter?

Yes, as Najeeb has just announced, a slight growth, 15% to 20% sequentially. The results are a better pipeline and certain deals which we will recognize revenue often this quarter, so we are certainly seeing a better quarter this quarter as opposed to the one that just finished.

Okay, great. Thank you. I appreciate it.

[Aga Sadat], private investor.

Hello. My question is NetSol is the biggest IT company of Pakistan and Pakistan is the world's sixth populated country in the world. Having said that, NetSol has access to vast ITD sources which is very key and unique for NetSol like companies. Is there any plan to enhance NetSol Professional Services division to provide more on-site (inaudible) services to decrease geopolitical impact on the Company?

I will have Naeem answer that (multiple speakers).

Yes, absolutely. The challenge is that for us there is a much better OI -- ROI [that] we sell our services and dollars and spending on euros as opposed to rupees. Certainly there is demand and need for services in Pakistan which can somehow offset the geopolitical challenges that we face. But we believe the ROI is still not attractive enough for us to grow aggressively in that market. If you know the history, we have been bidding on some big infrastructure projects within Pakistan and those have not yielded really good results. There's plenty of bureaucracy and there is still some uncertainty with the economy in Pakistan itself. So really in the near to mid-term future, we don't really see ourselves growing aggressively within Pakistan as we continue to see a better opportunity outside of Pakistan [in the world].

Thank you. Actually my question was more related towards the moving the resources from Pakistan into the Western market like Infosys and Tata is doing.

Well, our resources do move from site to site depending on where we're implementing, but certainly not in any great numbers because there is a big cost associated. So, for the time being, what we do is that we have the onshore-offshore mix. We keep certain number of resources on short which are client-facing and the rest actually work from offshore, which is a better pricing mix for us.

(Operator Instructions). [Joel Rosenfeld], Kensington.

Good morning. You had said you were going to address the delisting, the minimum bid requirement. I wanted to know any ideas, and what you're planning to do going forward? That is number one.

Number two, the [Company had] announced a buyback program. If I understand correctly, I had seen roughly something like I think was it two months ago there was a filing with a tailwind fund that had bought some convertible preferreds. I just wanted to know how one gels with the other? I hear you're raising money, I hear you're buying back. I mean what is going on there? Are these convertible preferreds [expiral], a [tax expiral] preferred and just keeps on driving down the price? I'm just befuddled. I'm very used, not only me. It seems that a lot of investors are confused.

Let me jump in -- this is Najeeb -- and then Naeem will [add] on (inaudible) the tailwinds question you have. First of all, on NASDAQ, we have about four months remaining to comply $1.01 requirement to maintain listing, which is our number one priority. I can assure you and all the listeners we will -- first we've just announced that we will have an improved growth in our fundamentals in the coming quarter. We also announced a buyback because we believe the stock is grossly undervalued. That reflects in our first full [incentive] buying from time to time.

Thirdly, we will continue, starting from next week after the earnings is out today, we've got aggressive (inaudible) roadshow to bring new investors, institutions, and analysts for our Company because absolutely this is an exciting buying opportunity for the new investors or even the existing investment shareholders.

So I'm pretty confident that, at this stage, we have no plans to exercise the reverse split option which as you know may be the last resort. But I am confident that, based on our improved results and our effort to go in the market aggressively to tell the story about our Company's product offering and our successes, we should be able to [reunderstate] the (inaudible) the listing.

Now, in terms of buyback, again, buyback is to do with price very low. We believe the Company will benefit. At this stage, as I mentioned in my statement earlier, that we're now [living] in capital. My first requirement is to meet the NASDAQ listing requirements, which is about within four months' time.

I'd like to make a couple of comments on tailwind. Naeem will give his perspective. The tailwind is an investor over the last six or seven years and just recently we had to roll over a previous debt for about $3 million or so with a new debt by paying off the old debt with a group called CIM. There's no -- (inaudible) is a straight convertible 8.25% coupon and conversion [had] actually at a very attractive price of close to $0.90 as a two-year note. So really, the idea between buyback and this capital was already injected in September and tailwind to several of the previous notes. So there is no new financing taking place with tailwinds.

[Mark Needle], private investor.

Thank you, but my question was just answered relative to the delisting options.

Thank you.

I am showing no further questions at this time. I will now turn the conference back over to Naeem Ghauri, who is Chairman and CEO of NetSol. Please go ahead, sir.

Thank you. Before concluding the call, I would like to briefly summarize our roadmap. Number one, our bread-and-butter NFS [next] solution is under development and is being demoed to few (inaudible) clients in recent months. Although for competitive reasons, we cannot disclose the exact timing of full rollout, we have seen a tremendous response from these clients so far.

Number two, we will continue to aggressively introduce our cloud and their leasing and finance solution to customers in North America. We are very excited about the prospect of this product in its first to market cloud delivered solution.

Number three, ramp-up the deployment of smartOCI in the US and leverage traction and Europe. Momentum for our Vroozi division is building nicely as smartOCI continues to resonate with Fortune 500 companies.

Number four, maintain strength in the Asia-Pacific region and seize opportunities as the leasing and finance sector continues to express growth. The environment is similar in Brazil and we are well poised to establish NetSol as the go-to solutions provided in the region.

Number five, repurchase NetSol shares which we believe are grossly undervalued. With the option to purchase 2.5 million shares, we believe the repurchase will enhance the value of NetSol shares and therefore benefit our shareholders.

Finally, continue to grow the Company, enhance long-term valuation, and deliver solid results. It has been 12 years since NetSol Technologies went public in the US, and we have weathered the ups and downs of a challenging global economy, all the while growing in international business. I am proud of our accomplishments and (inaudible) and I would like to thank our NetSol employees for their hard work and tenacity to succeed. I'd like to express my deep gratitude to our shareholders for their continued support. Many of you stuck with us in thick and thin, and we greatly appreciate your partnership. I'd like to emphasize that NetSol is committed to building value for our shareholders.

Finally, I'd like to thank our customers for their continued loyalty. Providing products that help businesses do what they do best is a priority to NetSol and we are thankful for the opportunity to do so.

This concludes our call today. We'll see next time and thank you for joining us.

Ladies and gentlemen, that does conclude our conference call for today. We'd like to thank all of you (inaudible) for your participation. If you'd like to listen to a replay of today's conference, please dial 1-800-406-7325 and for local numbers 303-590-3030 by using access number 4485811. Again, we'd like to thank all of you for your participation and you may now disconnect.