NetSol Technologies Inc (NTWK) 2012 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the NetSol Technologies reports 2012 third-quarter conference call. During today's presentation, the lines 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, Monday, May 7, 2012. I would now like to turn the call over to Patti McGlasson. Please go ahead.

Good morning. Thank you for joining us today to discuss NetSol Technologies fiscal 2012 third-quarter results. Calling in from our Calabasas, California office are Najeeb Ghauri, Chairman and Chief Executive Officer; and Shaz Khan, Senior Vice President, COO and co-founder of Vroozi. From our Pakistan office, we have Boo-Ali Siddiqui, Chief Financial Officer; and calling in from our London office is Naeem Ghauri, President of Global Sales and CEO of NTE and Vroozi.

Following a review of the Company's business highlights and financial results, we will open up the call for questions. I'd like to remind everyone 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 forecasts of 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.

Thank you, Patty, and thank you, everyone, for joining us today. I am very, very pleased to report that the momentum and the business has shifted in a very positive direction, recovering from a challenging period just a few quarters ago. Our top line is now approaching a similar level to last year, and sequentially our upward trajectory continues. Revenue came in higher than our projection and we now think that growth for the second half of the year will be strong, in the range of 30% to 40% over the first half, which is an impressive increase from our original guidance of 10% to 15%.

Across the globe, our entire team at NetSol is focused on improving the Company's performance, and the recent flurry of new business wins with top-tier global companies speaks to their determination. The demand for the current NFS solutions remains very strong, and at the close of the third quarter the pipeline for our current NFS solutions was up approximately 30% to 40% from last year. Specifically, we are noticing a surge in demand for the full suite of NSF solutions with some bigger deals in pipeline that are exceeding $4 million in value, which is up from historical average of $2 million deal value. We view this as an indicator that many of our global Fortune 500 clients and the auto and banking sectors are experiencing growth in their respective markets.

To further capture market share, we are moving full speed ahead with the rollout of our next generation NFS solution after one successful implementation in Bangkok. While we prepare for the launch later this year, our activities are focused on business development efforts in the US market for LeasePak SaaS under cloud-based solutions and for (inaudible) in the regions (inaudible) product. And now, with capital in hand to invest in the business, we're moving forward rapidly to capture market opportunities and build value for our shareholders.

Before taking a closer look at NetSol's third-quarter financial results and reviewing several recent developments contributing to our momentum, I'd like to discuss the recent capital raise. While the stock valuation for the capital raise was difficult for us all, it was a necessary step to shore up our balance sheet, provide growth capital for Vroozi and give potential customers further confidence to invest in our solutions. We have no plans at this time to raise additional capital and would only seek to use the shelf most prudently if an attractive acquisition opportunity comes to fruition.

So let me review several recent highlights in each of our business lines that are contributing to our growing momentum, starting with Asia-Pacific. We recently signed a $4 million agreement with the captive finance arm of a Japanese auto manufacturer, a brand-new global client [entirely] for us. We also signed a strategic agreement with Abeam Consulting, a leader in the SAP consulting space in Japan, to jointly develop and support business in the asset finance and leasing industry in Japan as well as cooperate in other key markets to serve Japanese corporations operating throughout Asia-Pacific region.

In China, we have signed multimillion dollar agreements, including most recently with Chongqing Auto Finance to implement the NetSol Financial Suite, Credit Application Processing System, Contract Management System and Wholesale Finance System. And we will begin recognizing revenue for this new contract before the close of the current fiscal year. To date, we currently have 17 customers in China and are ramping up our assets to further capitalize on the shift towards leasing in the country. China remains our biggest and fastest-growing market for revenue generators so far, and we have further ramped up our activities to secure new business in big-ticket leasing, equipment finance leasing and captive auto finance companies. I am very proud to say that in China, NetSol is a de facto market leader in our space.

In Thailand, we signed a consultancy and services agreement for a premier auto manufacturer. We also implemented the next generation of NFS for a Thai Stock Exchange listed bank. The next-generation solution is part of a greater rollout of a solution which I will discuss later in the call.

As we outlined for you a few quarters ago, we began shifting implementation of service of some [APAC] contracts with Thailand. This strategy has helped to reassure customers and has positioned NetSol to win more business, which we are doing. As a direct result, we are now building out a subsidiary office into a secondary global delivery center in Bangkok. To assist some of the new business efforts, NetSol Thailand also signed a partnership agreement with NEC India to develop business in the asset finance and leasing industry in India. Last year we won the first NFS client in India, Mercedes-Benz Finance, and that was implemented in summer 2011 from Bangkok.

In Australia and for the first time announced today on this call, NetSol will be developing a major enhancement for a large auto manufacturer's on higher purchase legislative requirement industrial and regional. That (inaudible) will automate the new legislative requirement in the system for compliance with high purchase provisions. Contracts such as these underscore our ability to integrate a wide array of customized solutions into our current products.

Moving on to Europe, I recently returned from a trip to NetSol office in the UK, where NetSol enjoys strong grant recognition in the leasing enterprise solution space and where we are actively marketing our solution. During the quarter, we signed an NFS agreement with a European Bank and signed a LeaseSoft license extension, data migration and program of custom software enhancements with another customer.

Let me now turn to NetSol North American division, which -- what I am most excited about is the opportunity for our Vroozi division. During the quarter, we won a few more contracts with major global companies including a top US media company, to implement the B2B e-commerce search engine suite. We're actively adding to these sales, marketing and development staff to the division. And Shaz Khan, COO, will speak more about Vroozi and smartOCI towards the end of the call.

Let me now briefly touch upon our joint venture efforts. AtheebNetSol in Saudi Arabia recently signed multiple agreements with a combined value of $2 million plus in the areas of cybersecurity, application development and consulting. And we are actively bidding on additional big-sized projects in Saudi Arabia. The multiple wins demonstrate our ability to implement a diverse set of customized solutions for our customers and underscore our ability to generate revenue for products outside our core suite of services.

We look forward to updating you on progress in other regions such as Brazil, in the near future. In summary, at NetSol, everyone is really excited about opportunities going forward with considerable growth prospects across each of the regions where we conduct business.

I would now like to turn the call over to our Chief Financial Officer, Boo-Ali Siddiqui, to review the Company's financial results for the third quarter before taking -- talking about our growth initiatives.

Across the globe, our business continues to build momentum with the top line coming in at nearly the same level as last year. And as we move forward, we are increasingly confident that this trend will continue. As Najeeb mentioned, the flurry of new business wins combined with some of our growth initiatives across the globe, including wins in the Vroozi division all bode well for each of our revenue line items.

Total revenue for the third quarter of fiscal 2012 was $10.6 million compared with $10.8 million in the third quarter last year. On a sequential basis, revenue increased 23% from $8.6 million in the second quarter of fiscal 2012. License revenue was $3 million compared to $3.7 million in the last year's third quarter and $2 million on a sequential quarterly basis. We are increasingly excited about the continued strength in license revenue. Maintenance revenue remained steady at $1.8 million when compared with the same period last year. Services were up 10% to $5.8 million compared with $5.3 million a year ago. On a sequential basis, services income increased 31% from $4.4 million to $5.8 million.

Moving forward, as we continue to gain new customers for our current solutions and roll out our next generation [tax form], our pace of recurring revenue should continue to show further improvement. Total operating expenses for the third quarter of fiscal 2012 were $3.5 million versus $2 million in the third quarter of fiscal 2011 and compared with expenses of $3.5 million in the previous sequential quarter. The year-over-year difference primarily reflects increased SG&A, primarily reflecting our increased staffing level in Thailand, China and in the US Vroozi division. We also recorded a lease abandonment charge reversal during last year which resulted in lower operating expenses.

Moving onto net income, we reported third-quarter net income of $1.7 million, or $0.03 per diluted share, compared with net income of $3.3 million or $0.06 per diluted share in the same period last fiscal year. However, on a sequential basis, net income continued to improve from $320,000 or $0.01 per diluted share in the preceding fiscal 2012 second quarter.

It should be noted that year-over-year diluted earnings per share calculations is based on a weighted average number of shares outstanding of 61.8 million diluted shares in the third quarter compared with 52.5 million diluted shares for the same period last year. We ended the quarter with $9.1 million in cash and cash equivalents. Accounts receivable were $14.6 million compared with $15.1 million in the third quarter last year. On a sequential basis, accounts receivable increased from $12.2 million, primarily reflecting signing of the new deals and the recognition of revenue on a percentage of completion basis. Average days outstanding for the period was 158 days, an improvement over 169 days in the corresponding period last year.

Looking ahead, given the relative strength of the Company's business throughout the years, NetSol now expects revenue growth of 30% to 40% for the second half of the fiscal year compared with the first half of the year. Additionally, we anticipate maintaining profitability for the full 2012 fiscal year.

Our CapEx expenditures for the fourth quarter should be in line with current trend. Investment into the development of next-generation NFS solutions will begin to taper off by the end of calendar year, while investments in the Vroozi division is estimated to increase.

I would now like to turn the call back over to Najeeb to provide more details on the third quarter as well as summarize our strategic growth initiatives.

Thank you, Boo-Ali. Our third-quarter performance is a nice improvement when compared with the previous two quarters, and our momentum continues to build as our efforts across the globe and assistance from our joint venture partners we are putting in place the pieces required for us to achieve a goal of doubling our business over the next two or three years. This is ambitious, but we feel strongly that it is achievable.

One of those key growth initiatives is in our Vroozi division. Let me now turn the call over to Shaz Khan to provide an update on the marketing of smartOCI and introduce one of our new products. Shaz, please?

Thank you, Najeeb. Our smartOCI solution continues to gain traction in the market place with a recent contract win with a major US media company, bringing total current customers to nine. Our new business pipeline remains strong and we are in regular discussions with several Fortune 500 companies in their respective purchasing organizations to implement our solution.

As Najeeb mentioned earlier, a portion of the recent capital raise will be directed towards the Vroozi division, and we intend to use those funds to hire sales, marketing and implementation specialists, the required infrastructure we need to close and service new business.

As we stand now, we are currently targeting first year annual revenue in the range of $4 million to $5 million for the division in calendar 2012. However, as we add resources and roll out additional products, we could greatly accelerate our revenue generation.

One such new product for the smartOCI marketplace is the smartOCI Catalog Manager, an offering to help companies with the process of exchanging and loading catalog content between purchasing organizations and their global supplier base, reducing the time to market for catalog content. This technology will be unveiled to potential customers at the upcoming SAP Sapphire Now conference on May 14, in which Vroozi will have a booth presence.

Looking forward, the opportunity for smartOCI looks very promising, and with additional tools added to the marketplace we hope to make it even more appealing to potential customers while increasing overall profitability of the division. We look forward to keeping you informed of our progress, and I would now like to turn the call back over to Najeeb.

Thank you, Shaz. As we look across the globe, we are focused on growth and conducting those activities which we believe will bring this Company to the next level. As US being the biggest market in our space, we are actively marketing LeasePak on SaaS model and now are turning our attention to the rollout of next-generation NFS, which we believe will open up our solution to a host of new companies in the US.

At the same time, we are continuing to market our current NFS solutions specifically to companies in the Asia-Pacific region where the current NFS solutions is preferred and is surging in demand. Looking at our current wins in the number of companies we are talking with now, we believe that our growth should accelerate. As such, we remain steadfast in our belief that the Company remains undervalued, and as such I and the rest of the management team continue to purchase shares and we anticipate this insider buying pattern to continue.

At NetSol we have hundreds of committed employees owning shares, and this trend is growing, too. We are extremely committed and are excited we execute on our plans to drive revenue growth and enhancing profitability for the long-term. And I'm confident our valuation will mirror our success.

Now at this stage, I'd like to provide an update on our NASDAQ listing status. Although the grace period to maintain $1 price will end by late August 2012, we are confident we will be able to regain compliance based on our execution of much improved results, aggressive marketing campaign through non-deal roadshows, investors conferences, enhanced Company exposure to institutional investors and expanded research coverage. In addition, we are very optimistic in our outlook for fiscal 2013 and we anticipate moving, providing guidance at the year end 2012 reporting call.

Now, based on the stellar efforts of my team to date, I have every confidence that 2013 will be a watershed year for NetSol that will elevate our Company to the next level of growth and brand recognition. Therefore, at this stage, the Company has no plans to file for a reverse split.

With this, I would like, operator, to open to any questions. Operator, please?

(Operator instructions) Howard Halpern, Taglich Brothers.

Congratulations. On the Vroozi revenue, where is that mostly going to be seen -- on the services line of your income statement?

Yes. Naeem, do you want to jump in? (multiple speakers)

Yes, thank you, Howard. The Vroozi revenue you will see in two specific areas. You will see it in license and you will see it in services.

Okay, I just wanted to make sure on that. And how many of the nine customers have been implemented as of today?

We are at four customers right now.

Four customers? And the rest should be done in the balance of this upcoming quarter, current quarter?

The remaining clients will be live within the next three to four months.

Okay, I will re-queue.

Mike Vermut, Newland Capital.

Excellent quarter. Two quick questions for you -- one, that $666,000 of charges; that's a one-time charge, I assume, in the quarter on the sale?

Right.

We shouldn't see any more of that, so we can kind of normalize and get to a $0.04 number?

Yes. Please elaborate your question. I don't think we're getting your questions.

I saw there was an item in your income statement, $666,000 loss on disposal.

Okay, okay. Boo-Ali, do you want to come into the discussion?

Yes (inaudible) -- it's just $660,000, I think. (multiple speakers) yes, it's a one-time loss.

Okay, got it. So we can adjust that. And related to this, when you're giving your outlook of possibly doubling the Company, the revenue line over the next two years, where can margins go with that? If we are trying to back into an operating income number, where do you think margins should go, once you get that acceleration on the top line?

First of all, let me just clarify. We are saying we can double our revenue between two to three years, so -- which is pretty aggressive, and I think it's achievable. Absolutely, when you see such a rise in license sales and business coming from primarily Asia-Pacific and then, of course, when the NFS is rolled out in all the key markets, I think this will tend to improve our gross margins. I believe, based on our track record, historically we have been over 65% to 70% gross margin range. But, of course, the Company is aggressively building the development center in Thailand and expanding in China, and now we are entering the Brazil market. They are all very opportunistic and growth markets for us, and we believe margins can continue to improve at an impressive pace. In the beginning, yes, Naeem and our team in Asia looking for expanding their sale organization, expanding their much more delivery capability because they have backlog, an exciting backlog that they can execute based on how fast we can improve our infrastructure.

So I think Naeem can make more comments on this thing, but I really believe the margin will improve as the sales improves.

Yes, just to add to that, the margins obviously improve with more license sales. And what we are aiming for with the new product coming online -- we have a lot of opportunity to go back to existing clients as well as new prospects to get an additional round of new license fees. So that's the exciting part, that we believe the license fees will be quite a big piece of this growth. So they continue to have good margins, and we are aiming -- our aim is to be above 60% gross margin.

Great, okay. So I was just backing -- you double revenues, you get to $0.40-$0.50 plus of earnings; correct? Just doing the math?

We would love to see those numbers ourselves, absolutely.

Right, okay -- but that's -- so I'm not off on that. Okay, I appreciate it, guys, and good luck on getting there.

(Operator instructions) Howard Halpern, Taglich Brothers.

Could you talk a little bit about the opportunities you should be seeing in Brazil and currently seeing in the Middle East?

Yes. Well, I will pick on Middle East and Naeem will jump in. Presently, he is overseeing directly the launch of that operation. You know, we've been in Saudi Arabia for just about over 2.5 years when we signed the JV. And recently you've seen some traction; we're getting some new contracts.

The market is quite well capitalized and the whole market in the DCC nation, not just Saudi Arabia alone, is really growing in their infrastructure in education, defense, public sectors and IT, and many, many of the new areas. So I see NetSol as the IT partner for a very established group, (inaudible) group, which is a well diversified group for many, many years in the kingdom, very well-known due to the royal family's ownership there. So I think we have a tremendous opportunity. And it is happening slowly but surely.

Now we are bidding into some bigger contracts which involve some serious use companies as well as partners. So I really believe that in next few years, the JV will really do well and really give us an amazing penetration and name as a premier IT company partner with a very established -- a local company in Saudi Arabia. So I'm really very optimistic about the opportunity there. So, Naeem, why don't you just tell them about Brazil, what we're doing there.

Yes. Traditionally, when you go to a new market, the longest time it takes is to actually get established and become preferred vendor to some of these larger companies because the biggest barrier to get in is always that preferred vendor status. So we did the hard work in Saudi Arabia. It took us a couple years, but we are now approved vendor. For example, we are approved vendor for Aramco. Saudi Aramco is the largest oil company in the region. Similarly, we are getting into other government organizations.

In Brazil, we expect it to be a very dynamic market. You can compare it to China somewhat, but I believe we can move faster in Brazil than we did in China because, in China, if you grew totally organically and did not have a partner, we went there on our own and it took us a couple of years before we won our first business. In Brazil, we are with a very established player with very deep roots into the Brazilian economy and business. So we believe our partner will help open a lot of doors. And they are extremely eager for us to launch the business, which we had a soft launch. But actually finding the right people to resource the Company, the JV, has been the most challenging aspect.

And also, we are in the middle of this recent raise. So we believe now we are well capitalized. We didn't want to sort of expand before we had the capital. So now we are well on our way in terms of actually doing a hard launch of the business. So you will start to see some news, maybe in the next six to nine months coming from Brazil, hopefully.

All right, and one last question. Could you just provide some, I don't know, historical background and where you are today in terms of how the pipeline has built since the end of last fiscal year and the first two quarters of this year into the third quarter, as you enter the fourth quarter?

Yes, I think I did the -- Naeem, go ahead.

You know, the way it works is that you might have seen quite a few contract wins recently. So that happens when you actually build a healthy pipeline. So, going forward, we feel that historically at a very strong level in terms of how much potential business is in the pipeline. So we believe a lot of that business gets converted. We believe 30%-40% will get converted into real deals in the next three to six months and the pipeline gets stronger, we will be seeing a lot of interest in Asia-Pacific for our NFS product. We're seeing a lot of interest in the US and Europe for Vroozi and smartOCI.

So, historically, we are at a very good position. That's why you see these numbers coming in this quarter and you start to see those coming in the coming quarters also.

Okay, guys, keep up the great work.

Tom Connolly, Thundercloud Consulting.

Congratulations, Najeeb; that's great progress. My question is around the geopolitical issues that came out a year ago, I guess, now, and how you've overcome that.

Good timing for that question. Obviously, as I said in the call a few weeks ago, that we were able to quickly respond to build up a pipe (inaudible) office in Bangkok. And now we have a full-blown delivery capability that's expanding the sources, local Thai employees and from other parts of the Company, and I think that has really helped.

When I mentioned about the successful implementation of Indian contracts first time last summer that was really, to me, a proof of the pudding where we were able to immediately deploy our team and implement the system with a major client in India.

So I think what you're seeing is Bangkok is becoming a secondary delivery center. Of course, our center of excellence remains in [Lahore] is actually getting stronger and stronger in terms of capabilities and development, you know, capabilities. But Bangkok is also another, we'll call it, an equally desirable location where a lot of customers -- and they will give a better color because they are coming to our facility and looking into our system and our people and our demos. So that is very comforting; this Company was able to quickly move and upgrade our global delivery model, not just in Bangkok, but also China and the UK and US. We're also beefing up our people so we can support local customers without having to depend on any one location.

I think exactly -- this is Naeem just jumping in. I think the big difference in the Company now is, as opposed to a year ago, was we were totally dependent on one location for delivery. And actually, when we had that big event in early May last year, it had an immediate impact on client sentiment as our business literally stopped for that quarter. But since then, we've gone through a huge effort to diversify out of our development center and into Bangkok. So Bangkok is now a real credible alternative to Lahore. And in that one year, we've had a lot of client visits into Bangkok -- new clients and then existing clients also have gone in and done their due diligence, looking at how viable that center is.

And I'm happy to report that really that dependency of having one center and having any geopolitical event in that region would have no significant impact anymore. I think, at the one time it would have a material impact. But now I believe we are past that stage, that it does not affect the Company to the core. It may have maybe a blip, you know. But now we've gone way past that point.

Great, thank you.

At this time, I'm not showing any further questions. I would now like to turn the call over back to Najeeb. Please go ahead.

Thank you, operator, and thank you, everyone, for listening to us today. And we'll look forward to seeing you again in the year end call sometime fall this year. So thank you and have a good day.

Thank you. Ladies and gentlemen, if you would like to listen to a replay of today's call, you may do so by dialing 303-590-3030, or 1-800-406-7325 using the access code 4534723. Thank you for your participation. You may now disconnect.