NetSol Technologies Inc (NTWK) 2014 Q3 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the NetSol Technologies fiscal 2014 third-quarter results conference call. (Operator Instructions). This conference is being recorded today, Tuesday, May 13, 2014.

I would now like to turn the conference over to Patti McGlasson, Senior Vice President, Legal and Corporate Affairs, General Counsel, and Corporate Secretary for NetSol Technologies. Please go ahead.

Thank you. Good afternoon, everyone, and thank you for joining us today to discuss NetSol Technologies' fiscal 2014 third-quarter results.

Before we begin, I would like to remind you that today's call may include forward-looking statements that are subject to certain risks and uncertainties. Please refer to the Safe Harbor statement contained in today's press release and also to NetSol's periodic filings with the SEC for a complete discussion of those risks and uncertainties that could cause actual results to differ materially from those you might perceive today.

I would also like to point out that NetSol may also discuss certain non-GAAP measures. The release issued earlier today contains a reconciliation of these non-GAAP financial results to their most comparable GAAP measures. Following a review of the Company's business highlights, financial results, and discussions of the Company's strategy, we will open the call up for questions.

Today's call is being webcast at www.netsoltech.com. Following the conclusion of the call, the webcast may be accessed on the NetSol website, where it will be archived for 90 days.

Joining me today on today's call is Najeeb Ghauri, CEO and Chairman of NetSol Technologies, and Roger K. Almond, CFO. The call is scheduled for one hour.

With that said, I will now turn the call over to Najeeb. Najeeb?

Thank you, Patti, and thank you to everyone joining us today.

Today's results reflect the continued transition to our next-generation leasing and finance solution, NFS Ascent, which officially launched in the second quarter of 2014. Roger Almond, our CFO, will provide our financial results momentarily.

The introduction of our new solution is progressing very well, with increased project size and scope. We're in the middle of transforming NetSol from our legacy system to a newer technology platform that we believe will be another flagship solution in the industry.

As with all large multimillion-dollar implementations, it takes time for both parties to conduct the necessary due diligence, and we want to be certain that we demonstrate the full value of our products and services. This, in turn, increases the length of the sales cycle in our near-term results.

That said, NFS Ascent is being very well positioned and very well received and we have strong visibility into our pipeline. Both we and our prospects believe that NetSol has the most robust leasing and financial solution available, providing customers with a highly flexible and scalable solution that includes mobility features, a SOX-compliant audit trail, third-party integration, among many other key features.

We have invested heavily into this new platform and are beginning to ramp up dramatically with new staff hiring, so that once new dealers sign, we are able to continue a sustainable growth trajectory. Today, we're working on deals, many of which I have described previously to you, that have the ability to transform our Company. It is not a matter of if we sign these new deals, but it is a matter of when we will wrap it up, our discussions with the customers. This gives me and the entire team the confidence we need to continue to further invest in people and infrastructure.

That confidence is supported by the market opportunity for our core solution, such as with multiple multi-country implementations with world-leading [order] and finance companies. NetSol has a history and working relationships to further penetrate key markets, just with the relationships we have today, to say nothing about our new relationships.

For the many companies on legacy self-developed systems, we can demonstrate how our platforms provides them with opportunity to improve efficiencies and allow for new ways to conduct business, including mobility. And for smaller companies, our next-generation platform provides a modular approach, allowing them to integrate components as they continue to grow.

The opportunity before us is large and growing, and capturing and servicing this opportunity is our primary focus. This is why we decided to divest from Vroozi, a cloud-based procurement platform, so that we can remain focused on our core business.

So that we are already to move quickly, which in part means the ability to service and support new and larger projects simultaneously, we are continuing to invest in our organization, hiring more than 50 software engineers in the quarter. These engineers are going through robust training at the NetSol technology campus to make sure that we do not sacrifice quality of service that has earned the trust and respect of our customers.

This investment enhances our ability to provide sustainable long-term growth and, we believe, will enable us to maintain our leadership position as the leading solution provider to the leasing and finance industry throughout the world.

With that, I now turn the call over to our CFO, Roger Almond, to review the Company's results for the third quarter. Roger?

Thank you, Najeeb.

As Najeeb just mentioned, our topline continued to be impacted by lower license revenue as a result of the transition to our next-generation solution and on the bottom line with additional expenses related to continued hiring of new employees.

Total net revenue for the third quarter of fiscal 2014 was $9.4 million, which is comprised of $2.1 million in license revenue, which consists primarily of contracts related to NFS, our first-generation solution; $2.6 million in maintenance revenue; and $4.7 million in service revenue.

Maintenance revenue was down sequentially from the second quarter of fiscal 2014 by approximately $311,000, but for the nine months ended March 31, 2014, our maintenance revenue has increased 8.39%, or $604,000, compared to the nine months ended March 31, 2013.

Service revenue decreased approximately $542,000 from the second quarter of 2014, but has increased approximately $400,000 when compared to the first quarter of 2014. Overall, service revenue was down compared to the previous year, due to the lack of service revenue associated with new license deals.

Process sales for the fiscal third quarter were $7 million, up from $5.7 million for the same period last year. The increase is related to two factors. First, our salaries have increased due to the hiring of 52 technical employees during the quarter and 278 employees during the fiscal year, and second, the increase in depreciation and amortization expense, as we have begun amortizing the NFS Ascent development costs now that the software has been launched.

Total operating expenses for the 2014 fiscal third quarter were $5.1 million, up from $3.8 million last year. This increase was due to higher selling and marketing expenses and general and administrative expenses. Operating loss for the third quarter was $2.7 million, compared with operating income of $3.1 million last year. Net loss was $1.3 million, equal to $0.14 per share, compared with net income of $1.6 million, or $0.19 per diluted share.

As Najeeb previously mentioned, during the quarter ended March 31, 2014, we completed the sale of Vroozi for $2.7 million and recognized a $1.9 million gain on sale in the quarter. The weighted average number of shares outstanding was 9.1 million shares for the fiscal third quarter.

Our cash and cash equivalents balance grew to $12.4 million from $7.9 million at June 30, 2013. Accounts Receivable were $13 million at March 31, 2014, compared with $14.7 million at June 30, 2013. Our revenue in excess of billings were $4.5 million at March 31, 2014, compared to $15.4 million at June 30, 2013.

During the nine months, we made purchases of property and equipment of $9.6 million related to the investment in our delivery centers and our IT infrastructure. We anticipate that our capital expenditures for the next 12 months to be up -- to be between $2.5 million and $3.5 million as we continue to position ourselves for long-term growth.

With that, I would like to now turn the call back over to Najeeb. Najeeb?

Thank you, Roger. Today, we're making a crucial investment for the long-term growth of our Company, investing in greater resources to capture market share for our new platform, which fulfills a unique need among new and existing customers, increasing our customers' efficiencies through real-time data analysis and facilitating their decision-making processes.

Across the globe, our team is hard at work to benefit Ascent launch activities. Confidence and morale of our team runs high and we are very excited about the prospects ahead. Ultimately, our strategy will be validated by results, and if anything, I would hope that the near term highly indicates where we believe the business is headed.

Our success for years with core NFS products stemmed from one key factor, that is we work in the best interests of our clients and partners. We provide what works for them and create solid ROI for every need our client. This is the single reason for our long-term loyalty and growing confidence in NetSol from our customers.

In a nutshell, we exist today because of our clients and partners. I would like to express my deep gratitude to our shareholders for their continued support as we navigate this transition period. Many of you have stuck with us through thick and thin and we greatly appreciate your partnership.

With that, we would now like to turn the call over to the operator for questions and answers. Operator?

(Operator Instructions). Matthew Paul, Sidoti & Company.

Thanks for taking my questions. In regards to the improved cash collections in the quarter and on the year, is there any change in payment terms for your customers here, or --

Yes, Matt, thank you. We actually have them quite well, as you said it right. Our customers are appreciative of the fact that we are obviously always ahead of time with our delivery implementations on all those pipeline projects and they went to make sure that we are getting our money on time.

So, it's simply a bit more contact with our customers through our pre-sales team to make sure that we get our builds and then [westpotate] on time, so pretty much more streamlined and much more connected with our customer in getting the payments.

Okay, and moving forward, the maintenance and service piece of your business was down about 8% sequentially, I think, if my calculation is correct, and I know in the prepared remarks, you highlighted the changes year over year and how the nine months of this year has increased from the nine months of last year. But is the sequential decrease because of the lack of license deals signed in the first three quarters?

Yes, that's pretty much it. As you know, we seized the aggressive activity for the R1. We didn't stop it, but we're now focused on NFS Ascent for the last six or nine months now.

What you will see in the coming quarters, of course, when we are fully stabilized with the sum negotiating and signing of new agreements for the NFS Ascent, this will come back on track, because naturally, in one way, we have shown increase in our maintenance income the last two years from the previous years. That's because you improve our pricing also and added more licenses in the last two years, but now that we're in a transition, in a kind of slope here for the new license sales, I believe as we sign the new agreements, they will follow with additional or incremental maintenance income.

But I think on balance, our income has actually increased from the existing customers and maintenance services.

Okay, and sorry if I missed this, but is it fair to ask you if you have any expectation to sign and accumulate license sales in the fourth quarter?

I cannot say that right now. All I can say is the buy plan is quite, I think, impressive. We get a lot of traction for both, of course, NFL Ascent.

See, what is really important to understand, Matt, is that our move to the new generation of the next-generation NFS Ascent is taking a lot more time for the due diligence between the customer, as well as the Company. And it is much more complex, multicountry, multilevel, and involves the bigger-size customers, bigger wallet, because they want to look at the system for multiple locations.

In the past, we used to do one or two deals for one customer with the whole solution. So now, the plan has changed because they want to spend more time in looking at the product, and we want to make sure that we are able to support those complex applications and installations in some certain big customers. So I believe that it feels like it has grown a little bit longer than it used to be in the past.

But as you mature, as the product matures and get more traction, I think you will see much improved results in the coming quarters. I can't say much about Q4, because we are not giving any guidance for the year.

Great, well, it's good to hear the optimism moving forward. In regards to your operating expenses, could you provide a little color on what a normalized rate would be moving forward? Is it going to be close to what we saw this quarter?

Yes, let me have Roger jump in.

I think as you go forward on the operating expenses, you see a lot -- you see an increase mainly in the sales and marketing, and as we hire additional marketing or sales staff, and then we are getting around -- flying around the country, marketing the product, you will see that probably start normalizing.

What we also talked about was the depreciation and amortization expense. You'll see that pick up about $1 million a year as we start amortizing off the product. That R&D expense that we had capitalized over the years as we produced NFS Ascent, you'll see that start to come through at about $1 million a year.

So I think this quarter as we have ramped up, that hopefully you will start seeing that normalize over the remaining quarters.

All right, guys. Thanks for taking my questions. I will talk to you soon.

(Operator Instructions). Howard Halpern, Taglich Brothers.

I guess following on to the last question there, in the cost of revenues side, is it going to be the depreciation and amortization that, going forward, should be the biggest variable and driver of that expense?

Yes, I think Roger will be best to answer that.

Howard, just to make sure I understand your question correctly, so you are asking regarding the cost of sales?

Right.

You are saying the variable going forward would be the (multiple speakers)

The D&A where salaries and consultants are pretty much -- you are at a level where that should remain sort of consistent?

I would think going forward that our amortization as we hit -- now that we have started amortizing the product costs associated with NFS Ascent, that going forward you would see about $1 million a year. So I wouldn't consider that a variable as it goes up and down because we pretty much have that being amortized now.

And so, you could anticipate during 2015 probably $1 million more of expense going through cost of sales, through amortization, than what was there during 2014.

Okay. And another one, because of the discontinued Vroozi operations. I did the calculation and the difference between the nine months and what we had for the first two quarters is approximately $290,000. Is it -- because I don't know that you're going to put out any kind of restatement yet, is it safe to assume that number could be split going backward, reducing services by that amount? Split that in half, the $290,000?

Roger, do you have the answer?

Howard, I am not sure I follow your question. Could you repeat what you (multiple speakers)

Yes, if you add up what was previously reported on the services side, those three quarters, it doesn't add to -- for the nine months, which is the Vroozi discontinued operations, I'm assuming.

Right.

And that comes to $290,000. So in my own rough restatement, if I just split that 290,000 between the first two quarters, that should be an approximation of what we will see when you do the 10-K, eventually?

Right, because what we have done is we -- GAAP requires us to pull out any revenues and expenses associated with Vroozi, because it's discontinued, and pull that down into the line item discontinued operations.

And so, the numbers for the three and nine months for both periods, for 2014 and 2013, those numbers, the sales numbers, have been stripped out of the revenues and your expenses have been stripped out and everything is just netted down in your income from discontinued operations.

Okay. Okay, I will do that rough estimate for that.

That's a GAAP requirement now, where they have us pull that down and put it into one line item there.

Yes. Of the license fees, what percentage was Ascent or was it all still mostly the old -- the legacy product?

Yes, we had (multiple speakers)

Go ahead, go ahead, Roger.

Najeeb, do you want me to take that?

Sure, go ahead.

Out of the (multiple speakers) million that we had, $1.3 million of it is related to NFS -- the new -- I'm sorry, not NFS Ascent, but our old product --

R1.

-- the R1. And then, we had some coming through NTNA through our LeasePak, and then some coming from NTE through our LeaseSoft, so that's how it was broken down.

Okay. And in terms of the pipeline, if you could maybe give a little color into what percentage you are seeing in those three regions -- US, Europe, and Asia, and especially skewed to the US. Does that pipeline put you on track for the percentage of revenues that you had wanted to achieve in prior calls?

Yes, absolutely. Howard, what is interesting in the last few months, since actually we announced the launch of NFS Ascent a few months ago, you're seeing much more traction in the North American market than we used to see prior to the announcement, maybe eight or 10 different deals on the table right now that we are working through, different stages, different levels, and mostly NFS Ascent.

As Roger said, we were looking for a bigger growth in the US market in the coming months or coming years, but in the Asia-Pacific market, it is actually even stronger, and we are looking at some customers in Thailand, in China, some in Japan, other parts of Asia-Pacific market, very robust activities.

We're also seeing good response from the European customers. I don't have the liberty of sharing any name, because we have not made any signed agreements yet. But overall across the globe, we have seen a good response from all our customers, existing, and the new prospects.

Now what it means is that we made a timely decision when we announced the launch, and yes, we have taken a little hit on the revenue, as expected, but I believe the pipeline is very encouraging and our teams are extremely busy across the globe in meeting with the customers and demos and read shows and whatnot. So I think, as I said in my prepared remarks, we're really excited about the Ascent future and how this will shape our Company and the whole industry as a whole.

And one last one. Is anything new going on in the Mideast region?

Any -- come again, I missed the first part.

Is there anything -- do you have any new contracts or prospects in the Middle East?

Actually, we are so focused in our emerging markets, especially for our core business, we like to do downside activities in the Middle East simply because our markets are so full of activity in Asia and Europe and the US. We can do much better service to make sure that we still focused on our core business and the partnership is still there, but I think we will continue to really focus on our core business, and we believe that we need more people and more infrastructure to map out the opportunity we have. I think that's why we decided to divest Vroozi a few months ago, so I think really focused and excited about the opportunities we have in our space.

Okay. Keep moving forward and hopefully 2015 will be our banner year coming up.

Yes, we sure hope so.

Okay, thanks.

(Operator Instructions). I am showing no further questions in the queue. I would like to turn the conference back to management for any closing remarks at this time.

Thank you again for your support. I look forward to reporting to you on our next progress in the next quarter. Thank you all, and I hope good day and good evening.

Thank you. Ladies and gentlemen, this concludes the NetSol Technologies fiscal 2014 third-quarter results conference call. We thank you for your participation. You may now disconnect.