NetSol Technologies Inc (NTWK) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the NetSol Technologies reports 2012 second quarter and the fiscal year conference call.

During today's presentation all parties will be in a listen-only mode. Following the presentation the conference will be open for questions. (Operator Instructions) This conference is also being recorded today, Thursday, February 2, 2012.

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

Good morning and thank you for joining us today to discuss NetSol Technologies' fiscal 2012 second-quarter results. On the call today are Najeeb Ghauri, Chairman and Chief Executive Officer; Boo-Ali Siddiqui, Chief Financial Officer; Naeem Ghauri, President of the Americas and Europe; and Shaz Khan, Senior Vice President, COO, and co-founder of Vroozi.

Following a review of the Company's business highlights and financial results we will open the call up for questions. I would 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 under the Safe Harbor provisions of the Litigation Reform Act. The Company's discussion may include forward-looking information reflecting management's current forecast and certain aspects of the Company's future and our actual 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, and thank you, everyone, for joining us today. I am very pleased to report that we beat our revenue projections for the fiscal 2012 second quarter, which is a testament to the hard work and determination of the entire team at NetSol.

After two consecutive challenging quarters prior to this quarter and now with the Company's performance improving, we believe our pipeline and products are well-positioned to further capitalize on a business environment that appears to be shifting into positive territory.

During the second quarter I visited with NetSol developers and our sales team domestically in China, Pakistan, and Saudi Arabia, and there is a growing sense of excitement as the Company expands its global footprint, introduces new product to the marketplace, and leverages existing relationships with long-standing customers.

The global economy is still working through a difficult period, but our second-quarter results reflect an improving sentiment evidenced in recently executed and implemented contracts for NetSol's next-generation NFS solution and the positive reaction we are experiencing for our smartOCI e-commerce search engine. I must state the response [with] smartOCI solution in the last few months has been phenomenal.

As of the close of our second quarter our pipeline remains robust, up about 25% from the same time last year for NetSol's core solutions in addition to a growing funnel for our e-commerce division, Vroozi, which includes smartOCI. I would like to also note that we anticipate continued sequential revenue growth of 10% to 15% in the second half over the first half. This trend gives us increased confidence in achieving profitability with our fiscal year ending June 30, 2012.

Before taking a closer look at NetSol's second-quarter results and the Company's direction for the second half of the year, I would like to review several recent business highlights that are contributing to NetSol's momentum. They include the successful go-live implementation of the next generation of our NFS suite for Kiatnakin Bank, a leading provider of financial services to commercial and corporate sectors in Thailand. Now that our next-gen solutions are going live [in this year] we look forward to continuing to implement these solutions for new and existing customers.

We have a robust pipeline of NFS and next-gen solutions with 30-plus active leads at different stages of development in China, Japan, Malaysia, Thailand, the US, and the United Kingdom. In China we have strengthened our partnership with industry heavyweight, Minsheng Financial Leasing, by signing another agreement to implement our NFS solution.

NetSol enterprise-leading solutions became the benchmark in the banking industry in China as NFS went live with Minsheng Financial. The second-phase agreement is important with a long term commitment because it paves the way for implementing more leasing and financing solutions throughout the region.

In the US, our Vroozi division announced a new professional services contract with LTC Supply Source valued at over $1 million. LTC is an emerging partner in the long-term care industry's procure-to-pay arena. Demand for smartOCI is continuing to rise in the US and Europe and Shaz Khan will provide more color on our progress with Vroozi later on today's call.

And in September we welcomed a new CEO to Atheeb NetSol [Saudi Company] Limited, our joint venture based in Riyadh, Saudi Arabia. We are gaining traction in this region with the implementation of all of our solutions and services in the public and private sectors, including defense and banking industries. These initiatives are helping NetSol adapt to an otherwise tepid business environment.

Also working to our advantage is the ability to deliver quality solutions with a strong value proposition. Many of our customers are dealing with the very same economic conditions that we find ourselves in, but we have a competitive edge when going up against some of the larger software developers due to higher ROI. We are a focused and quality-driven technology company that develops and delivers solutions to Fortune 500 clients worldwide.

The bottom line is that our solution offerings are more robust than they ever have been before, and we anticipate that demand will strengthen throughout the second half of our fiscal year. But before we can reap the rewards we still have some progress to make. Our financial performance is improving sequentially and that is an important and pivotal start as some markets are showing resiliency and uptick in demand for our business offering. We believe it is onward and upward for the second half of our fiscal year.

I would like to now turn the call over to our CFO, Boo-Ali, to review the Company's financial results for the second quarter. Boo-Ali?

Thank you, Najeeb. It appears we have reached an inflection point in the second quarter fiscal 2012 reversing the losses on the previous two quarters. Much of that [strength] stems from our strong top-line performance which ultimately helped us swing to a profit.

We are still down on a year-over-year (technical difficulty) looks like there has been a break in the clouds as we head into the second half of the fiscal 2012.

Revenues for the second quarter fiscal 2012 totaled $8.6 million as compared with $10.4 million for the same period a year ago. Sequentially, our top line increase 38% when compared with the first quarter fiscal 2012.

Second-quarter license revenue were $2 million compared with $1.1 million in the previous first quarter of fiscal 2012, reflecting the selling of new contracts. We are feeling increasingly confident that licensing fee will continue to improve in the second half of fiscal 2012.

Total operating expenses for the second quarter of fiscal 2012 were $3.5 million versus $3 million in the second quarter of fiscal 2011 and compared with expenses of $3 million in the previous sequential quarter. The slight bump in operating expenses is mostly related to our joint acquisition of Virtual Lease Services with United Kingdom-based Investec which we announced in October.

We remain committed to continuing to monitor operating expenses closely in the second half of fiscal 2012. We reported second-quarter net income of $320,000, or $0.01 per share, compared with net income of $1.9 million, or $0.04 per diluted share, in the same period of last fiscal year. However, on a sequential basis we swung to a profit in the second quarter versus the $1.5 million loss we reported in the first quarter.

Looking ahead (technical difficulty) for the second half of fiscal 2012 from the first half. Additionally, as Najeeb stated earlier, we anticipate achieving profitability for the whole year. Historically, our second half of the year is a stronger period for NetSol.

I would now like to turn the call back over to Najeeb to provide more detail on the second quarter as (inaudible) our strategic growth initiatives for the remainder of the year. Najeeb?

Thank you, Boo-Ali. Our second-quarter performance is a nice improvement when compared with the previous two quarters. Now it is time to build upon that momentum and continue to drive enhanced shareholder value.

As you may know, NetSol stock has been trading below $1 for several months. We do not want to lose our NASDAQ listing, nor do we favor a reverse split. With our grace period ending at the end of February, we are confident that we will qualify for an automatic extension. The extension will provide an additional six months for the stock to trade above $1.

It goes without saying that we believe the stock is grossly undervalued at these levels. But while performance is king we will also maintain consistent communication with our existing shareholder base as well as introduce NetSol's story to new institutional and retail investors and the new research analysts.

Thankfully, we have a lot of exciting developments at the Company and our second half is already shaping up to be a very prolific period. Before catching you up on business initiatives in each of our regions, I would like to give the call to Shaz Khan, our Senior Vice President and co-founder of Vroozi, to discuss the significant strides we are making with our e-commerce division. Shaz?

Thank you, Najeeb. Indeed the first half of fiscal 2012 was an important period for Vroozi. Our smartOCI solution continued to gain traction in the marketplace, culminating with a multimillion dollar implementation agreement of the SAP procurement and smartOCI platform with LTC Supply Source which we announced a couple weeks ago.

We are regularly meeting with prospective customers, including many Fortune 500 companies and their respective purchasing organizations. We are pleased to announce successful live implementation of our smartOCI system and several of these companies have signed implementation agreements for which we anticipate recognizing revenue during the next 12 months.

In addition, Vroozi is attracting top industry talent and I am pleased to announce the hiring of [Michael Sundel] as our Vice President of Technology. Michael is an alumni of Shopzilla, one of the largest business-to-consumer price comparison shopping engines on the Internet, and he is an influential technology leader and visionary in the business-to-consumer and business-to-business e-commerce space.

What makes our cloud-based smartOCI solution so compelling to the marketplace is its ability to seamlessly integrate with company's e-Procurement systems to provide a Google-like BtoB shopping experience. For example, let's say I am a manufacturing company that needs to order more sheet metal. SmartOCI will help employees identify sheet metal suppliers with the ease and efficiency of a supercharged search engine.

At the close of the second quarter we had more than 25 active leads in the United States and Europe. With thousands of global companies in need of procurement systems, the road ahead for smartOCI looks very promising. The key objective in the next 12 months will be installing the systems and generating consistent revenue from implementation, subscription, and professional services.

We look forward to keeping you informed of our progress. I would now like to turn the call back over to Najeeb. Najeeb?

Thank you, Shaz. The convergence of the cloud in our core software IP, including NFS and smartOCI, is an important step for NetSol's growth strategy and I am proud of the accomplishments of our Vroozi team. As well as the emerging growth stories of NetSol, I look forward to reporting news about contract wins and implementation in the second half of this year.

I would like to take a moment to catch you up briefly on strategic initiatives in each of our regions, so let's begin with our Asia-Pacific region.

As I mentioned earlier, we have a very strong pipeline throughout Asia including China, Japan, Malaysia, and Thailand. We have formed partnerships with companies in each of these countries while they provide us with a nice entree to new business in this burgeoning marketplace.

A few other important developments include going live with the NetSol Financial Suite product for a Fortune 500 company in Korea, the signing of a multimillion dollar agreement to implement our NFS solution for a major European automobile manufacture in Malaysia, and the go-live of our NFS solution for Daimler Financial Services in India.

We delivered our first implementation in India from our NetSol Thailand office as we have created an alternate delivery center in Bangkok to enhance our global delivery model. While we only generate a [good] 5% of revenue from Pakistan, we are engaged in a select new project in Pakistan in sectors including financial services, education utilities, and telecommunications.

Moving over to Europe, the ongoing debt crisis has posed challenges for many of our customers. However, the economic environment has also opened up opportunities as many companies seek lower cost solutions for the same high-quality performance they received from our larger competitors. As a result, we continue to form strategic partnerships and win business throughout the region.

We recently embarked on an automation program for a major European Bank using our LeaseSoft portal. We also engaged in a Web services integration project for a UK consumer loans business. This project will deliver a fully-integrated loans platform that will result in enhanced customer service and portfolio management by connecting all branches in the national customer service center to a single data source.

Europe is an important market for NetSol and we are well-poised to benefit from our increased traction in the region as the economy improves. Earlier we reported an acquisition of a UK-based Virtual Lease Services in partnership with Investec Asset Finance to enter lease and finance business outsourcing industry in the UK markets. This acquisition was aimed to enhance our breadth in the UK markets and provide complementary offerings to our current client base and to expand market share.

The integration of VLS with NetSol was seamless and strengthened NetSol's solutions in the marketplace with a solid financial institution in the UK.

Let me now provide a quick update on Brazil. You may recall we formalized a joint venture with Brazilinvest at the end of last summer. I am pleased to report that we continue to make progress with our South American partner to attain the required legal and corporate documentation to be able to launch NetSol business in Brazil. We expect to ramp up operations with Brazilinvest in the next few months and introduce all our solutions to this vibrant marketplace.

For more than three decades, Brazil Investment Group has provided development services for businesses across sectors including automotive, financial, agriculture and utility. Looking ahead we intend to leverage Brazil [Investment's relationship] and unleash the power of this great nation.

In North America Shaz already provided an update on developments with our e-commerce division, Vroozi. So I would like to note that we have hired about nine new programmers to Vroozi following the successful traction we are experiencing with smartOCI in the US.

Our legacy business is also progressing nicely in North America. We recently introduced an enhanced version of our leaseback solution, which is being actively pitched to customers for additional licensing revenue. The functionality of this new version is impressive and so far the reception has been excellent.

We also signed additional enhancement projects with three of our US major customers. Adaptability has been the key to maintaining our business in a weakened global economy. This characteristic, along with several others, has enabled us to maintain relationships and expand our global presence.

Before opening the call up two questions, I would like to briefly define the characteristics that are empowering NetSol in the second half of fiscal 2012.

Number one, for the past decade we have been able to win contracts over companies that are 10 times our size. Why? Because we are a world-class end-to-end software solution for running leasing and financial business operations, and I believe we are the most talented group of developers in the world.

They are working tirelessly to accomplish projects with the highest level of professionalism and integrity, which we know is what separates the wheat from the chafe in this, or any, business. They are the reason NetSol has a 100% delivery and implementation record and has never lost an NFS client.

Secondly, we continue to develop solutions that are innovative and indispensable. Specifically Vroozi is rapidly becoming a significant growth engine, so the Company has smartOCI attract a whole new segment of business. We are just beginning to factor smartOCI into our revenue models and Shaz and his team have done a phenomenal job introducing this product to prospective customers. I look forward to keeping you abreast of these contracts as the remainder of the year unfolds.

Finally, we have a global presence that enables us to deliver top-notch solutions in all key markets around the world. With an established presence in China, Thailand, US, UK, Pakistan, Saudi Arabia, Australia, and now Brazil we are truly diversified in the regions and the customer base we serve.

In conclusion, our goal is to harness these characteristics to further fuel the business, grow our top line, improve our bottom line, bolster our assets, and ultimately enhance shareholder value. In the second quarter of 2012 we beat our revenue expectations by 38% and recorded a profitable second quarter, and I can assure you that we are fully committed to further improving our financial performance of the Company in the year ahead.

On behalf of the NetSol's management I would like to thank our loyal customers and you, our shareholders, for your continued support. I would like to thank our devoted employees who make NetSol the provider of the highest quality solution in the world.

I would now like to open the call up for questions. Operator?

(Operator Instructions) Mike Vermut, Newland Capital Management.

Great job on the quarter and I guess turning this around so far. Can you just go into more detail, I guess about the smartOCI marketplace? How large the potential is? What you are looking at? What vehicles are for that?

Then also on that are you getting any support from SAP or some push from SAP into their customer base?

Yes, I will let Naeem lead this and then Shaz will come in to help your second question.

Great, thank you.

Hi, Mike. Yes, smartOCI really is for us quite a big diversification from our traditional business. Last six months especially have been very exciting where we are at times proactively approached by large Fortune 500 companies to demo the solution, and then we had about five signed contracts and engagements and projects already started.

The potential is great, because of what we are building within Vroozi. SmartOCI is just one piece. We are actually building a future marketplace where buyers and sellers meet in that BtoB environment.

So there is very little out there in terms of how our technology will be deployed. It's clearly a game changer and for a new entrant to come and win business against already established players we are offering something quite different and unique as a user experience to our potential clients. So, Mike, we see great things happening going forward. Maybe, Shaz, you might jump in and add some more color?

Thank you. Mike, this is Shaz. In regards to the second question on the SAP support, we are an SAP partner. SmartOCI is an SAP-certified product and we received tremendous support from SAP management as well as some of their procurement experts in the space on a global level.

They are continuing to provide and send leads our way for companies that are looking to optimize their procurement process. And it's a win-win for both parties. SAP's focus is to generate more licensed sales for their core e-procurement offering and smartOCI fits right into that puzzle.

Great. Just what I was getting at, how large is the market potential here for smartOCI?

SmartOCI currently is a SAP-centric product. The install base for SAP procurement implementation, we have about 1,200 clients running the supplier relationship management platform which smartOCI integrates with. And then you have another 20,000 clients that run for SAP purchasing on a global scale, which smartOCI also integrates with.

So the market space is quite huge. As you know, SAP controls about 65% to 70% of the Fortune 500 enterprise resource planning market. We feel very bullish about our relationship with them and look forward to growing the business.

Excellent. So when you look down the road three, four, five years this could be the largest part of the business?

I will jump in. It has to grow into a long-term sustainable business. Again NFS has been going 15, 16 years solid. SmartOCI, a new business for us so hard to project figures, but in terms of traction and in terms of interest we are getting far more interest at this stage than we ever had on NFS in the early days.

Certainly our timing is great, because as you can imagine there is more efficiency needed. Any business process in procurement is one business process which basically you part with a lot of cash when you buy something. The big corporations, when they look at these processes, if you bring in even a 3%, 4% savings -- and in fact, we can deliver bigger savings -- when they look at just using a search engine to bring a buyer closer to a seller it can save a percentage of your spending budget, that is a huge USP.

So really this is beginning to grow faster than we imagined. We didn't expect to be with about six live clients now. We will be at the SAPPHIRE show in May, which is a global SAP show, the biggest in the world, and we believe that is the start of our first real marketing initiative for smartOCI and Vroozi because it so far has been more soft marketing and through referrals from SAP as Shaz said.

So we haven't actually gone to market yet. So we are very excited what happens the middle of the year and the amount of interest we are hoping to generate.

Excellent. Great job, guys, and good job on the quarter.

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

Well done, great quarter. Just a couple of questions. Can you give me some indication on what your license revenues look like for the upcoming quarter?

Yes. Naeem, you want to come in?

Dan, we can't give you exact numbers because we are still in the quarter and we cannot disseminate that information yet. However, we are tracking better than the previous quarter and, as Boo-Ali said earlier, that our second half is always stronger than our first half, traditionally at least. And it seems that way.

And in terms of the guidance we gave today, we are very confident that we will beat the first half by at least a 10% to 15% margin.

Okay, that is fine. And the last question I have is with your accounts receivable. First of all, great job bringing it down. I know I have been tracking this for a while, but if you can give me some indication on your accounts receivable of how much of that $12 million that I show is greater than 90 days and greater than 180 days.

First of all -- Daniel this is Najeeb -- most of these receivables are in Asia Pacific -- China, Thailand, Japan, and so forth. Boo, do you want to give them more detail on the timing?

Yes. (inaudible) $12 million, I think one-third is more than 80 days and the remaining is within the period of 60 to 180 days.

Okay. Do you see any risk in receiving those ARs greater than 180?

Can I just jump in? What happens in Asia, Daniel, is that in terms of payment terms they are not traditionally what we get in the West.

We have experienced now for the last 10 years Thailand and Singapore, Japan and Australia. Well, Australia is not so bad. But certainly the Far Eastern countries, and China especially, they just don't have this as a best practice to pay in 90 days.

They eventually do pay. And I cannot remember, Boo-Ali if you remind me, if we ever had to write anything major off. But certainly we are very confident that these are recoverable and 180 days is not uncommon. Traditionally over the years 180 days is very much a reality in Asia. But these are good, solid receivables and as you can see from how much money came in over the last two quarters that they do pay in the end.

Okay. Just one related question on that. Your revenues in excess of billings have increased also. Can you help me understand why those have gone up?

I think it's more to do with China again and, Naeem, you want to explain how the (multiple speakers).

Well, it's the same issue that we essentially have done work ahead of time and some of these payment terms are -- so we do a deal and say you cannot bill us for three months or six months. Typically in the companies that are set up in China, in the first few days, months, they don't have ability to pay because they are still waiting for their licenses, etc.

So we continue to do the work and we revenue it because as we deliver and as we perform the services according to GAAP we are able to bill it or able to at least recognize the revenue. And then we start billing according to our payment terms which sometimes trigger later, so this is also quite normal.

I understand. Okay, great. Gentlemen, thank you and once again, well done.

There are no additional questions in the queue at this time. Management, please continue.

I thank you all for joining us today and we will see you in the next quarter. Have a good day.

Thank you, ladies and gentlemen. That does conclude the NetSol Technologies reports 2012 second-quarter and fiscal year conference call. If you would like to listen to a replay of today's conference, please dial 303-590-3030 or the toll-free number of 1-800-406-7325 and enter the access code of 4509594.

Thank you for your participation and you may now disconnect.