NetSol Technologies Inc (NTWK) 2015 Q4 法說會逐字稿

Good day, and welcome to the NetSol Technologies 2015 fourth-quarter and year-end conference call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Matt Sheldon, Investor Relations for NetSol Technologies. Please go ahead.

Good morning, everyone, and thank you for joining us today to discuss NetSol Technologies' FY15 fourth-quarter and full-year results. On the call today are Najeeb Ghauri, Chairman and Chief Executive Officer; Roger Almond, Chief Financial Officer; and Naeem Ghauri, President Global Sales, who will join us for the Q&A session. Following a review of the Company's businesses highlights and financial results, we will open the call up for questions. The call is scheduled for one hour.

First, some housekeeping before we begin. Please note that all of the information discussed on today's call is covered under the Safe Harbor Provisions of the Private Securities Litigation Reform Act. The Company's discussion may include forward-looking information reflecting Management's current forecast of certain aspects of the Company's future, and our actual results could differ materially from those stated or implied. These forward-looking statements are qualified by the cautionary statements contained in NetSol's press releases and SEC filings, including its annual report on Form 10-K and quarterly reports on Form 10-Q. I would also like to point out that NetSol will be discussing certain non-GAAP measures. The release issued earlier today contains a reconciliation of these non-GAAP financial results to their most comparable GAAP measures.

In addition, I'd like to remind everyone that 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 archived for 90 days. With that, I will now turn the call over to Najeeb. Najeeb?

Thank you, Matt, and good morning, everyone. We are very proud to have achieved record revenue for the fourth quarter and year, underscoring the momentum we have built into our business. Over the past few years, NetSol has changed dramatically, and today, I believe that we are stronger than ever before. From a financial standpoint, revenues surpassed our prior record, not only for the fourth quarter but also for the year, as we continue to recognize revenue from the implementations of the $16 million NFS Ascent contract and build upon the base of contracts underway.

Now the EBITDA improved to a gain of $5 million, or $0.52 per adjusted share, for the FY15 from an EBITDA loss of $2.3 million, or $0.25 per share, and that does not take into account stock-based compensation. In addition, we ended the quarter with a strong cash balance of more than $14 million. With that as a back drop, now consider that our client contracts are increasing both in value and in complexity. Where were once signing $1 million to $2 million deals, and then to $4 million to $5 million contracts, we are now signing some agreements valued in the range of $9 million, $14 million and $15 million, or more. These larger and more complex implementations occur over a longer time frame, providing for steady revenue growth that is exactly what I mean when I refer to game-changing deals.

As we sign larger agreements for NFS Ascent, we also continue to have healthy demand for our first-generation solutions, particularly in China, which I will discuss later in the call. Along with the financial strength and a sizeable new business pipeline with potential new agreements in various stages of discussion, we are also stronger from an organizational standpoint. We invest in our delivery centers in Lahore and Bangkok, making a number of senior hires in the UK and in Germany, along with addition in China, Australia, and the US. An investment that was made not just to get back to where we were, but to greatly exceed it.

As I've also articulated in past calls, our aim is to grow to $100 million in revenue as soon as possible, while generating solid return for our shareholders. That piece of growth is expected to come from the large multi-year, multi-country contract we mentioned in the call last quarter. We are making solid progress on closing this agreement and can report that we were selected as the sole preferred vendor and have already implemented a complete installation of Ascent, which is being used for training and familiarization by their internal users. The size and scope of the agreement and the fact that it covers a 10-year period, 5 years for implementation and 5 years for maintenance, dictates that we take our time. While I'd like to provide a specific date on closing, it is prudent that we do not put an artificial clock on negotiations. We will provide a further date at the appropriate time.

With that, I'll turn the call over to Roger Almond, our CFO, to review our financial performance. Roger?

Thank you, Najeeb. Indeed, we are stronger than we have been in the past. Revenue for the fourth quarter received record $15.4 million, led by total service revenue of $10.6 million, which includes our joint venture services revenue referred to as services-related party. We also reached a new revenue high for the year at $51 million compared with $36.4 million last year, reflecting as with the fourth quarter, strength in total services revenue. Services revenue continues to be strong as a result of enhancements and change order requests, along with NFS Ascent contracts which carry a larger service revenue component. License fees for the fourth quarter were $1.4 million compared with $606,000 (sic -- see press release "$607,000") last year. For the year, license fees were $6.3 million compared with $5.4 million. We recognized approximately $900,000 in license revenue over the year from the $16 million Ascent deal with approximately $900,000 remaining. Maintenance fees were expected -- were as expected at $3.2 million, compared with $2.6 million last year. Maintenance fees for the year came in at $12.2 million and are expected to gradually increase as we implement NFS Ascent and as other customers go live.

Our cost of sales were $10.3 million for the quarter and $33 million for the year, up from $9.9 million and $27.7 million, respectively. The increase was related to the hiring of new employees, as well as higher amortization expense related to NFS Ascent. We expect cost of sales to remain stable, since most of the hiring is now complete. As you may recall, since 2013, we added nearly 370 technical employees across all disciplines and regions, serving NFS, NFS Ascent, NetSol Innovation, and along with a few other areas. The hiring we are now conducting is primarily for senior staff in the UK, Germany, and the US. Gross profit for the quarter rose to $5.1 million from a loss of $358,000 last year. For the year, gross profit rose more than $9 million to $18 million from $8.6 million last year. Operating expenses for the quarter were $5.4 million, down from $7.3 million for the same period last year, with the decline primarily related to a $1 million bad-debt expense taken in the 2014 fourth quarter. For the year, operating expenses were $23.2 million, up from $21.8 million last year, related to new business activities, employees conducting demos throughout the world, and other marketing activities.

GAAP net loss narrowed to $707,000 for the quarter, or $0.07 per share, compared with a net loss of $7.2 million last year, or $0.79 per share. Net loss for the year decreased by nearly half to $5.5 million, or $0.57 per share, from a net loss of $11.3 million (sic -- see press release "$11.4 million") or $1.25 per share, which included a $0.13 per share gain from the sale of Vroozi. Removing depreciation and amortization, as well as other items described in our press release issued today, EBITDA, a non-GAAP measure, was $2.7 million for the quarter, or $0.26 per adjusted diluted share, and $5 million, or $0.52 per adjusted diluted share, for the fiscal year. This compares to an EBITDA loss of $3.3 million for last year's fourth quarter or $0.36 per adjusted diluted share, and $2.3 million, or $0.25 per adjusted diluted share, for last fiscal year. Cash and cash equivalents at year end were $14.2 million, up from $11.5 million last year.

With multiple large value contracts in our new business pipeline, we are very optimistic about the year ahead; however, until we narrow the range and conclude the exact timing of the new contracts so that we don't put an artificial time clock on negotiations, we are holding off on providing specific guidance at this time. What I can say is that we do expect solid growth for the coming year and that we look forward to updating you on our progress. With that, I would like to now turn the call back to Najeeb. Najeeb?

Thank you, Roger. From Asia Pacific to Europe to North America, our new business pipeline is solid and growing, comprised of potential deals of various sizes and complexity, including conversions of existing NFS customers to NFS Ascent, new customers in a variety of industry verticals, as well as LeaseSoft and LeasePak version of rates. In APAC, we continue to extend our market share and remain confident about our opportunities in that region. As it relates to China, our confidence stems from the relaxing of new licenses from the Chinese regulatory body for new market entrants, along with changing consumer dynamics, the lowering of interest rates, and a series of policy incentives recently announced. A recent Reuters article highlighted this development, stating exactly and I quote, Beijing rolled out a series of policy incentives to shore up China's financial leasing business, aiming to better serve the broader economy at home and increase competitiveness overseas. Domestic leasing companies are encouraged to improve competitiveness in their core businesses, such as the leasing of aircraft, ships, and construction machinery, and are also urged to explore new industries, including wastewater and sewage treatment, telecommunications, agricultural infrastructure, and green vehicles, end of quote.

Now we believe this is a big opportunity, and that no other finance and leasing software provider is better positioned and equipped than NetSol to serve a growing need. Emerging markets in the region, including Thailand, Vietnam, and Cambodia, also are looking to make their presence felt in the asset finance industry, providing further opportunity for us as well. In Europe, we are making steady progress. We are now getting ready to kick off and upgrade project, moving a customer from LeaseSoft Ascent, which we discussed in the last quarter, and we are actively marketing and demoing the solution to current and prospective clients. In North America, we also are actively marketing our solutions, including NFS Mobility, and remain encouraged about our prospects. As we look ahead, we are indeed very excited about our ability to deliver greater value to our customers and shareholders. Again, we are pleased with our progress to date and the hard work and dedication of our team throughout the world.

With that and for the time remaining, I'd like to open the call for the questions. Operator, please?

Thank you.

(Operator Instructions)

We'll take our first question from Howard Halpern with Taglich Brothers.

Congratulations. Great end to the fiscal year.

Thank you, Howard.

So when you talked about China, I just want to make sure I understand. Even though the global view is China is slowing, the leasing industry in that asset finance industry is from the Chinese government perspective, it's going to be a tool that's going to be used to start to rev up growth in China?

Yes. I'll answer a few comments, and then of course, Naeem will also jump in. First of all, I believe -- we believe that the leasing industry in China is still very young and it's the beginning of the growing stage -- growth stage, and because of the fact that if the economy slows down, we have seen that it actually becomes a catalyst for the leasing and financing market. And I think when you heard the numbers in the past and some calls that we've talked about, the penetration, the usership is really low; has gone from 11% to 15%. I think there's a bigger market opportunity for us, and we have not directly noticed any slowdown in our demand for our customers. Matter of fact, some of the deals are large size are from China, so I think Naeem can add more color, but I feel very comfortable about the opportunity for us. Naeem, do you want to jump in?

Yes, sure. Well, Howard, we started from a very low base in China, because the penetration levels for leasing and finance are still very, very low from a global perspective, so China really is still a very nascent market. The second thing is that we actually had a slowdown when the regulators stopped issuing licenses for finance companies, and they do that when the economy is booming but they actually try to slow down if the market gets too heated. But when the market is starting to slow a little bit, they in fact, are encouraging setting up more finance companies so that they can counter the slowdowns. And leasing and finance is really a bit of a stimulus to the economy if some of the businesses can't afford to buy equipment in cash, they can actually lease it. So really, it's that kind of, if you like, contrarian to the market, and so we are continuing to see a good growth, a good amount of inquiries and lots of demos going on. So really at the moment, things are going well in China.

Okay, can you also talk about in terms of the services revenue? Can you break that down between the Ascent NFS, and existing customers coming to you for new projects or expanding of what they have on their systems?

Yes, I think we did have a record service revenue growth in the fiscal year. But Naeem, you want to break it down, or Roger, anyone can jump in? I have [enough information].

Roger would have the numbers.

Howard, let me throw some color on that. If you look at the NFS Ascent deal, the $16-million deal, we've broken that out that $10 million is going to be service and licensing, with about $1.8 million to $2 million being the license, and the $8 million being services. So at this point, we've recognized probably about $4 million in services related to that deal, and about $900,000 of that has been the licensing portion. So the other servicing revenue would come from the change request and would also come from some of the small implementations of the other NFS legacy product that was implemented during the time period. So just -- if you look at like $4 million is going to be the NFS Ascent, and then the other is going to be change requests, and then a small portion related to the other license deals that were sold into China during the year.

Okay, now looking out a little bit, because you see what you'd have in the general pipeline. But can you break down maybe over the next two years what you hope to see in terms of revenue distribution, geographically between Asia-Pacific, North America, and Europe?

Yes. We believe, Howard, that Europe is looking very impressive for us. All the investment we made recently, especially in the last fiscal year -- this fiscal year, the one we reported, with the addition of some senior sales executives and the plan we have a few large potential NFS Ascent deals in the [project]. One is, we already mentioned in the prepared remarks. I believe Europe contribution will grow. At the same time, I believe Asia-Pacific market will still maintain its growth, because of the -- a lot of new markets that we are growing and potential pipeline that we talked about could potentially help increase further contribution in the Asia-Pacific market. So region-wise, both Asia-Pacific and Europe both continue to show pretty upbeat growth. At the same time, the US, we are gradually building our capability to support the leaseback [up relation], and of course, Ascent. At the same time, we have good traction for the legacy system in Latin American market. So we are pretty excited about the growth in all these regions; however, I believe overall, if you look at the base number we have set up in this results, you can see the stage is really strong for us to expect stronger growth in the coming two years and even beyond that. And I'm sure Naeem can add some more color in terms of what you feel about the pipeline.

Okay, well in terms of where we are seeing biggest opportunities at the moment, really Asia is still number one, and then I'd say the next would be Europe and then the US. So Asia is still continuing to be strong and most of these projects are typically multiple countries. So we're recently in discussions with a number of potential clients for multiple projects, and the same is happening in Europe. There's at least two clients we're talking about, installations in Europe as well as in the UK. So really at the moment, the most actions is in Asia, then Europe, and then the US.

Well, guys, keep up the great work, and I look forward to seeing what transpires in the next couple years.

Thank you, Howard.

Thank you.

We'll go to our next question from Mike Vermut with Newland Capital.

Hi guys, how you doing? Great quarter.

Fine, thank you, Mike.

Can you just go over your -- how we should look forward at incremental margins as you start to land some of these larger, more predictable deals? How much on the infrastructure you need to add, or has that all been added already, and costs should stay pretty constant and you get significant dollars dropping down for every incremental revenue dollar coming in?

Sure. Roger?

Yes, as we look through, in the past, most of our hiring has been completed, so we don't anticipate large costs being added to the cost structure. There always will be additional costs as you're doing your sales and marketing, as we are spending more effort out marketing NFS Ascent. But as you -- as we increase on the revenue side, I would expect pretty much most of those dollars dropping down to the bottom line. Now what you do have to factor in, however, is that increases in innovation, which we expect maybe 10% to 15% growth in our innovation, which is our joint venture, only 50% of that drops down to our bottom line, because we own 50% of it. And also with PK Tech or NetSol PK, we only own 65% of that Company. And so, as the dollars drop down, there will be that non-controlling interest portion that you have to make sure you factor in. But we do expect that most of our costs have been, our infrastructure has been completed. And so we wouldn't expect large costs to incur as we increase our revenue to $60 million to $65 million throughout the years.

Right, okay. Then also, when you look at it, you guys have a very good idea of the contracts that are in the pipeline, the probability of them getting done, and the future cash flow. The cash flow this quarter was very impressive. Is there a point where you say, okay, the stock isn't reacting to this; and you start to buyback the stock ahead of all of this inflection? If it doesn't react?

Well, Mike, good question. We believe, as we always watch our cash flow, cash levels regularly, and we're still a growth-stage Company. We've invested a lot in the last two or three years, as we've seen from our G&A and capital expenses, to build a great product and of course [hire] a lot of people and infrastructure. While, as Roger pointed out, we don't expect bigger spending this year, other than normal R&D, but it's better that we use our cash to maintain the growth. I think it's more prudent to invest in our growth, and from time to time, (inaudible) we will try to increase our ownership in NetSol Pakistan, which we wanted to do that for some time. But I think that will be the wise thing to do. That will really improve our EPS, if that happens. So for now, we'll watch our cash very closely and find the best way to use the cash and really continue the growth.

Okay, and then one more question here. When you look at your large embedded customer base, how many have already transferred over to the new Ascent platform and then how many can we think are going to, just to get an idea of the pipeline out there?

Well the large deals, as discussed, I think I haven't disclosed the size of the Assent-related deals is much larger. I think quite a few of them in pipeline, under negotiation, and it almost made good progress in how soon we can close them. And they are much larger than the legacy (inaudible) NetSol NFS solution. So I believe the deals to open value take time to finalize. We'll update accordingly, as we believe and we can report that have even signed off, but I believe these sizes are quite impressive. All the reasons that we believe we are excited about all the growth opportunities and some reflection in this fiscal year. So we're pretty confident we have a growth pattern that's quite healthy with a robust pipeline. So I think you will see onward trend very positive.

Great, okay. Appreciate it. Keep up the great work, guys.

Thank you.

(Operator Instructions)

We'll take our next question from Mike Hughes with SGF Capital.

Thank you. Just a follow-up on your comments on China. Have you actually done deals outside the core auto leasing market there? You mentioned shipping equipment and planes. Is that all ahead of you at this point, or you actually recorded revenue in those verticals?

We have done one -- two banking deals. Naeem can mention I think, our run of course, with the pipeline for the (inaudible) vertical.

Yes, well in China, we have one very, very large client, which is a bank, which only does aircraft and ships. So they already are a NetSol client. And we have a sprinkling of other clients, as we are predominantly auto-captive. But I would say maybe about 10% would be non-auto that would be made particular asset leasing companies, and some do planes and some do ships, some do both.

How would you compare the opportunity in a big ticket assets to your core auto leasing, because I would assume that's a very large opportunity?

Well actually, funny enough, the opportunities in terms of what we can get for our solution don't necessarily buy the asset type or the asset class. Really, it's more volume business that generates more revenue for us. So an auto manufacturer, if they do 500,000 contracts a year by leasing a Mercedes or a Toyota, it is far more lucrative for us as a client than somebody who does five airplanes a year. Because their system need is, although complex in terms of the asset class, but they don't really have huge budgets for systems, because they don't have huge volumes. So only this one client in China who developed a very, very complex system, they spent a lot of money. But typically, these big ticket asset companies, they don't write a lot of deals. The systems are not typically that sophisticated.

Okay that makes sense, thank you. And then, Roger, do you have the geographic revenue mix for the year or the fourth quarter, either would be fine? Do you have that yet?

Yes, yes. For the year, North America is bringing in about 10%,11% of the revenue, Europe is about 14%, and then Asia-Pacific about 75%. And that's for the year.

The year, okay, great. And then on the salaries and consultant line, it was $4.9 million in the March quarter, and then it fell out close to $6 million in the June quarter. What accounted for that increase, because my impression from the last call and then some of your comments on this call is most of the hiring was behind you? So can you just speak to that increase?

Yes, there was some hiring during the fourth quarter, but what usually happens is in Pakistan, they have -- when they do their salary increases, they do one for the lower employees in January, and then in April is when they give the management their salary increases. And then you have your year-end bonuses, commissions, et cetera, that get pushed into the fourth quarter. If you look at the last year in 2014 and you compare the third-quarter salary and consultant with the fourth-quarter salary and consultant expenses, you'll see the same dynamic of that increase in the quarter. So that's where you'll see that increase from third quarter to fourth quarter.

Okay, and then similar question, depreciation and amortization number was $1.9 million in the March quarter, and then it stepped up to $2.8 million in the June quarter. What's going on there?

Yes, during the fourth quarter, we -- there are three intangible assets that we -- that were sitting on Pakistan's books that we wrote off. We completely amortized. They were with some older, non-core products. And so we just -- there's $1.2 million associated with those three products that we've just completely amortized to zero. So now, the only intangibles sitting on the books at Pakistan will be the NFS Ascent going forward.

Okay, so the $2.8 million number will step back down to maybe the $1.7 million, $1.8 range?

Correct. Correct.

Okay, so that was somewhat one time in nature. If I adjusted for that, you actually would have been EPS positive in the quarter I think?

Exactly.

Okay. And I appreciate your comments about not giving guidance. You certainly don't want to give the clients too much leverage in the negotiating process. But you're almost through the September quarter, so how should we think about revenue for the September quarter? Will it step back down a little bit?

Yes, let me jump in. I think first of all, Mike, the quarter is looking good. It's shaping up quite nicely, and we see strong growth year over year. And of course, we are building a good stage position to stronger revenue for the whole year. And typically, I don't know how long you've been holding our share, but historically, Q1 starts slow, then it builds up momentum each quarter, and then by the time you see them, the first half you'll see much more improvement when you compare sequentially, but the quarter is looking good. Definitely way stronger than last year's same period, and we are comfortable the way it's moving up. And of course, we still haven't closed the quarter here, so can't really give exact numbers.

Okay, that's all I had, thank you very much.

Thank you, Mike.

Thank you.

At this time, we have no further questions. I'd like to turn the conference back to Mr. Najeeb Ghauri for any additional or closing remarks.

Thank you again for joining us today. As always, on behalf of our Board and management team throughout the globe, I express my deep gratitude to our shareholders for their continued support, and we will talk to you next time. Thank you very much, have a good day.

That concludes today's conference. We appreciate your participation.