NetSol Technologies Inc (NTWK) 2016 Q3 法說會逐字稿

Good morning and welcome to the NetSol Technologies third-quarter 2016 earnings conference call. All participants will be in listen-only mode.

(Operator Instructions)

After today's presentation, there will be an opportunity to ask questions.

(Operator Instructions)

Please note, this event is being recorded. I would now like to turn the conference over to Patti McGlasson, Senior Vice President of Legal and Corporate Affairs, General Counsel and Corporate Secretary. Please go ahead.

Good morning, everyone, and thank you for joining us today to discuss NetSol Technologies' FY16 third-quarter results. Following a review of the Company's business 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 be archived for one year. With that, I will now turn the call over to Najeeb. Najeeb?

Thank you, Patti, and welcome everyone to those on the call from here in the US and North America, as well as from Europe and Asia. Today, I am reporting from NetSol Technologies' campus in Lahore, and joined from Bangkok by Naeem Ghauri, President and Head of Global Sales, and Roger Almond, Chief Financial Officer from our headquarters in LA. I am also very pleased to welcome a special guest today, Jeff Bilbrey, who currently serves on the Company's Board.

Jeff is an experience technology executive with expertise creating, delivering and sustaining technology products and related services. He's founded a boutique IT strategy consulting business and has guided product strategy across seven countries. He also led the North American Technology Operating Division for the Innovation Group, who is our joint venture partner.

I am pleased to announce on the call today that Jeff will be joining NetSol, to lead the North American Division as the President of North America, and our growth initiatives in NFS Ascent in the region. You will be hearing from him later in the call.

Now turning to our results, reported earlier this morning. The quarter came in as expected, with continuation of multiple contracts underway from our -- for our entire portfolio of finance and leasing solutions. Importantly, we remain on track with a solid finish through the year, achieving our guidance and profitability objectives.

During the quarter, we began our $8 million NFS Ascent implementation in the UK, and the 12-country, $100 million plus NFS Ascent contract. While the -- when work began on these contracts, it slightly affected our service revenue on a sequential basis. Work is now ramping up in the current fourth quarter.

Again, we remain on track with our revenue target for the year, and I have confidence in our growth -- and our growth trajectory is moving forward. Part of that confidence stems from the 12-country Ascent implementation that began in the quarter, starting with South Korea, South Africa, Australia and China, with China accounting for the largest implementation.

Each of these countries provides another important reference point in our marketing efforts, especially to expanding the client base in China. We remain very excited about the market opportunity in the country, as more finance companies enter the Chinese market, and finance and leasing of [autos] increase adoption, something I've highlighted in the past calls.

According to a recent report about the China market, millennials, those born in the 1980s and 1990s, are increasingly turning forward to financial products or for [trading cars], with a penetration rate of those who either finance or lease expected to reach 50% in the country by 2020, exceeding $2 trillion [RMB]; that compares to penetration rate in the low teens today. But that is a large growth.

This translates leads to increased needs to our customers and ultimately higher-valued products as customers or prospects manage more contracts on our system. This will also one reason why it's important for us to continue to penetrate the European and North American markets, where nearly every finance is -- or lease is, [versus] an all-cash opportunity.

With our expanded team in Europe and soon-to-be expanded team in North America, we are focused on capturing market share and helping our clients improve their productivity, consolidate IT systems, and create new, efficient ways of conducting business.

Looking at our pipeline today it continues to remain strong further benefiting from The 12-country NFS AscentTM implementation which we believe is the largest deal announced in our space. Their investment of more than $100 million-plus and the scale in which they're implementing it demonstrates their confident investment in our solution. We now focus on the deliveries and going live in each of these countries which will provide additional confidence to our prospect and further benefit our marketing efforts.

Indeed it is a very exciting time and we are focused on driving improved value for the shareholders. With that I'll turn the call over to Roger to review our financial performance. Roger?

We reported 23% year-over-year growth for the quarter with total net revenue of approximately $16 million compared with $13.1 million last year. Total license, services and maintenance revenue were up year-over-year. Total license revenue was $1.8 million which included contributions from our entire portfolio of solutions of more than $1 million from the sequentially 2016 second quarter.

Total maintenance fees were stable at $3.4 million. Total services revenue advanced a $10.7 million from $8.8 million last year.

For the 2016 second quarter services were slightly down primarily related to when work begin on the 12-country contract. We expect services to be strong moving forward as we make progress on the contract as well as others underway.

As a percentage of total revenue, total cost of revenue for the second quarter of 2016 decreased to 53% from 64% for the same period last year. Gross profit rose to $7.5 million from $4.7 million last year. Operational expenses were $6.3 million for the 2016 third quarter nearly flat year-over-year.

We expect our cost in fourth quarter to remain relatively consistent with our third quarter. On a GAAP basis net income for the third quarter improved to $849,000 or $0.08 per diluted share, as compared with a net loss of $1.6 million, or $0.17 per share, in the third quarter of 2015.

Non-GAAP adjusted EBITDA which primarily removes depreciation and amortization and stock-based compensation was $3.2 million for the third quarter of 2016, or adjusted EPS of $0.30 per diluted share. As compared with adjusted EBITDA of $1.6 million, or adjusted EPS of $0.16 per diluted share, in the third quarter of 2015.

For the first nine months of FY16, total revenues advanced to $45.5 million, with services income comprising $31.9 million. This compares with total net revenue of $35.7 million for the same period one year ago, with services revenues comprising $21.6 million. GAAP net income was $1.3 million, or $0.12 per diluted share, for the first nine months of FY16, versus a net loss of $4.9 million, or $0.51 per share, for the same period last year.

At March 31, 2016, cash and cash equivalents were approximately $11.8 million compared to $14.2 million at June 30, 2015. During the quarter, we purchased 705,000 shares of NetSol PK common stock and a total of 1.4 million shares for the first nine months of FY16 for $767,000, resulting in an overall decrease in non-controlling interest to 33.4%.

Turning now to our outlook. We continue to expect minimum revenue of $62 million for the fiscal year and on the bottom line we expect to exceed $1 in adjusted EPS for the year. As we had additional revenue moving forward, we are confident in our ability to build leverage in the business especially as we expect to add more revenue from Europe and eventually North America.

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

Thank you, Roger. We are extremely pleased with our progress and with revenue for the first nine months up more than 27% compared to the same period last year. And we are only just getting started with 12 country implementation, which included China, South Africa, South Korea and Australia as well as the $8 million contract Ascent business that we signed in Europe and which Najeeb described earlier.

And as a result, our target market remains extremely strong and our sales pipeline continues to track ahead of expectation. Our sales and marketing teams throughout the world are extremely busy and we are benefiting from [NFS Ascent] sites in Europe and Asia as well as the 12-country regional implementation providing a strong reference for the rest of the world.

As you go live in our large programs, it adds to those considering our next gen solution including those in North America. North America is an important market for us, where we have long-term client base.

To head up our growth initiatives in that region I'm pleased now to introduce Jeff Bilbrey. Over to you, Jeff.

Thanks, Naeem and good morning. I joined the Board in 2013 and have had the pleasure since then I've seen NetSol's positive transformation firsthand, including the deployment of the aforementioned next generation solution and additions and expansion of marquee client logos across the globe.

Knowing the Company's strategy and market opportunity and its deep connection with customers and the technology behind the products and also having known the people and talent at NetSol since my days with Innovation group where I launched the highly successful joint venture with NetSol. I couldn't pass up the opportunity to lead the NetSol North America operations.

I truly believe the market is right for NFS Ascent and we have an excellent opportunity to build upon a strong client base in the US and further penetrate the market adding new clients as well. So I'm happy to say that I transitioned from the Board to start with NetSol on May 23, and we look forward to updating you on our progress along the way. With that, I'll turn the call back over to Najeeb.

Thank you, Jeff. Standing where we are today with large contract now underway and initiatives throughout the world I and excited and energized about NetSol future and confident in our talented team.

For that remaining time, I will now open the call up for questions. Operator?

Thank you. We will now begin the question-and-answer session.

(Operator Instructions)

The first question this morning will come from Howard Halpern of Taglich Brothers. Please go ahead.

Congratulations. Great quarter.

Thank you.

The first question, license revenue, was it mostly comprised of legacy, or was it more of a combination with Ascent product?

Roger, please you jump in.

Yes. It was a combination of both. We had some legacy products sold into Australia and into China, and then we also had our Ascent product with those in Europe and with the Asia Pacific area, so a combination of both of those.

And going forward with the implementation of the $100 million contract, the European contract, do you believe that you could drive gross margin to that 50% mark in the next couple of quarters?

We did 47.5% in Q3 we distributed today, and we are from almost 37% for the nine months, also, which is a pretty healthy trend. You can see our control in our hiring, and, of course, cost of sales. I believe it is a reasonable goal, and we are also aiming that in [15%] range in the coming quarters.

Okay. And can you describe how the implementation in the $100 million contract is going in terms of the country rotation that your planning on executing.

Yes, Naeem, please answer.

Yes, Howard, we have got four countries currently under implementation, which is China, South Africa, Australia and South Korea? This is quite a heavy if you like workload and our resources are extremely busy. Each of these four countries are major in their own right in terms of size and volume of business. So we are busy with that. So what will happen is, as each of - one of these countries go live, we backfill it with another market. So that we had any given time we are able to do four in parallel. So you know see the fifth country sixth coming as soon as the first and the second go live.

Okay. This question might be for Jeff, North America. What do you see is the real opportunity and how do you go about starting to build a pipeline of business?

Hey, Howard. I'm happy to say that I'm really optimistic about the opportunity in North America. However, I'm still an independent on the Board and haven't started yet. So it's a little bit difficult for me to answer that one with specificity. I think I had probably referred to Najeeb on that.

Okay.

Yes, I think you know Jeff -- Howard, Jeff will be fully up to speed and the year end call will be ready, up and running a lot of to say and add for the North America business.

Okay. So one last one. A little while ago you announced collaboration with eego. Could you provide some insight and your thinking behind that collaboration?

Very exciting opportunity, but let Naeem answer. He is the one who has done the deal.

Yes, eego, if you have checked out the website, they provide 3D mapping into your and next year mapping. And they already have a few blue chip lines. So essentially what we are trying to do is define, and we have found synergies on some of things we are doing with our clients, as well as something which you can look at in terms of diversification. So there is some complementary areas on what we are planning to build for our clients, as well as things that which are probably new for us.

But there is one common denominator, which is essentially our resource pool; the talent that we have in Lahore is second to none. And so this is being leveraged and we have been able to leverage those resources to get a stake direct stake in eego, and so essentially when these products are market ready, will be able to offer some of these or existing clients, as well as going out to the mainstream market. And 3D mapping is a new space and there are very few players in it; especially the interior mapping. It's quite hard at the moment. So we really excited on where this is going so far.

Okay. Keep up the great work.

Thanks Howard.

Thank you.

Our next question will come from Mike Vermut of Newland Capital. Please go ahead.

Hello. Great quarter there.

Thank you.

Thank you.

Question for you here. So as we look -- I don't want to jump here -- but looking out of the next few years, as the contracts build, as we build here in the US and in Europe, and I remember the few calls ago you said that our expense structure is pretty much intact until we get to that $85 million, $95 million, or $100 million range. You did a great job on the expense side here. Is that the way we should be looking at here, and that's where the leverage comes from. Is that you are pretty set on the SG&A side, and the leverage should really start to kick in as we move from the 62 to 70s to 80s, and you don't really need to add much more infrastructure up until that $90-ish million level?

In addition to what you said companies already think, making sure that we are much more efficient, much more productive, and get the best quality from our back end developers, programmers. And in one way you are right, we're not looking for any major developers or programmers hiring because we have enough scale and capability. But at the same time we're making more strategic investment. For example, now Jeff is joining the company as a [very sin] executive help us work on the US market, which is exactly our biggest market that we've yet to explore, when it comes to our NFS and [Mal] Ascent.

So I believe we are pretty comfortable with our cost structure and all of us, including Naeem, myself and Roger, very involved and sure that if anything -- we are hiring anymore and we don't do some attrition where we get, we maintain the best quality of resources. At some point we also let (inaudible) go, but our focus is on building strong revenue growth. And as Naeem said we are very busy on this implementation of so many deals. And the pipeline is strong, so we are very busy in delivering those projects, and at same time we are working with the new project at the same time.

So I think we will continue to improve our margins. You are seeing improvements last two quarters and I think we are quite committed to keep the cost in control. Naeem do you want to add some more.

Yes, look the numbers are telling the story, because apart from some minor incremental costs, because obviously the more projects you do, you have to put more project managers and so on -- on a project. But I think from an infrastructure point of view we are all set. We have a good ramp up scale available with the facility in the Lahore without having to build anything big out. So I think the only incremental cost I see potentially when we hit the $70 million, $80 million over the next few years, is essentially just maybe just those additional project managers, and you know people at the very, very top in terms of development resource, in terms of very back-end resource, we have very good scale already.

Right.

Is there any way to give us insight into that pipeline in the US, UK, and Europe and how many of those discussions are with your current customers? That are now looking to migrate to Ascent in the US or in Europe? I think that makes it an easier sale for the Company.

I can tell you things are extremely busy in Asia, Australia, Pacific. These three parts are extremely busy; we are stretched in terms of from sales perspective. We are extremely stressed trying to cover everything. So that's good news. In Europe, quite a few interesting opportunities just popped up, so pipeline is very healthy.

So Europe is slightly behind in terms of how they're tracking, but they're certainly way ahead of where they were a year ago. So you like for example a year ago we were only talking with that one client, which we are implementing now. But we are in talks with at least one more, which is quite mature. And hopefully will mature very fast.

And then, then there are others who have just dropped into the pipeline, two at least on a medium stage and two or three early stage, so which is good news. Now in the US we've got Jeff starting later this month and he's going to have a pretty busy you know schedule over the next two or three months. Because essentially one of the first things we are going to ask him to do is to go visit all our existing clients, which have shown interest in upgrading to Ascent.

Those discussions have happened in the past, but now at the senior level, we have now got an NTA President I think there is changes the level of engagement and seniority. And these discussions start to get a bit more serious. So US would be a little bit further behind. So this is how we're tracking.

So would we expect within the next year to have some real US contacts, or is it farther out from there?

It's being built speculation, Mike. If I would say the next 12 months, I would say certainly we - sales cycles are like nine months to maybe 18 months typically, right. So I think I'm very confident that we'll be in a sales cycle or two for sure. In the next fiscal and how they mature and close within the fiscal year is anyone's guess. Because we don't control the sales cycle. But I can tell you nine months to 18 months is a typical sales cycle, and we already have a couple of good leads. And how they mature and track over the year, but certainly we don't - we cannot speculate on that.

And then another statement on that, what are the size of these deals in Europe and the US and what are the margin profiles of these verses Asian contracts?

What's happening, Mike, is that we actually raise the bar now. In terms of the product mix that we now have, it's really just at a different level to what R1 NFS was. So we're able to charge premium pricing for our resources that the people were selling at x before. Now we can sell it at x plus 40% or 50%. So that's a really big spike on the rates.

So that helps, and then secondly we're also been asked to provide more and more of SaaS pricing. And SaaS is great for us, because that has recurring revenue and then longer-term contracts and this is gone, so it's not so lumpy anymore. So we're starting to build some SaaS interest, as well, and one of the [calf] of strong deals that we have in Europe are based on that model. So pricing definitely is premium compared to our old product set, but it will be a nice mix of both license, as well as SaaS, which is as you go monthly kind of rental.

And then last question and I'm not asking for a forecast or anything, but when you sit back and you look at the next three years because the scope of the contracts you have signed already, is it much easier for you to see that - I'm going to make up, 15%, 20% type growth going forward? Or is it still we need to fill these pockets. Or do you have that good setting on both the cost side, the revenue side and it's much easier for you to give a - to look at a three to five-year forecast for the Company?

So I wouldn't go as far as the guidance or forecast, but it's just under topline part. I don't think we should be putting it in the guidance kind of forecast. But I think what we would say is that our expectation is from a sales perspective that if we're not hitting 15%, 20% year-on-year then we should be. So really that's what I tell my team that we need to show 15% to 20% growth every year, now that goes next year, or year or two after. I can't go that far out. (multiple speakers).

We'll keep over the annual guidance, so I think let's watch what we talked in the year end about 2017. So pretty optimistic.

Okay. Well, congratulations. This is a fantastic quarter.

Thank you, Mike.

Thank you.

(Operator Instructions)

And the next question will come from John [Serafini], a Private Investor. Please go ahead.

Yes. Good morning, gentleman. Wonderful job on this quarter.

Couple of questions for you if you can. I noticed in the press release, one of the bullet points talks about revenue - minimum revenue expectations, net revenue of $62 million for this fiscal year, that we will conclude on the end of June and anticipated EPS of $1 a share. It seems wonderful to me.

How do we get to that $1 a share? I know this quarter we have the non-GAAP metric at $0.30 per share, so how do we get to the $1?

We already have $0.76, I believe for the nine months.

Okay.

But $0.30 for the Q3, and our total EPS on a non-GAAP basis is $0.76.

Okay. So it's regular --

Yes. I think we look pretty healthy, though. So there will be a record for us to have a dollar plus EPS on EBITDA basis.

It's wonderful, so it's standing achievement, really, but certainly as a shareholder. I appreciate that I just was curious to see whether that's how you are going to say that, so --

We have a very strong CFO, by the way.

Yes, you do. He does an excellent job for you, so we appreciate all the work that you do here. One other related - well I don't know if it's related, but I know over time our strategy is to purchase more shares of the PK subsidiary and that now we are controlling now -- . Well, the non-controlled shares are about 33%? What's the plan going forward, will be we continue to accumulate shares in the subsidiary and eventually can you indicate in anyway what percentage you may end up with, say over the next year?

Yes, I think we did you've seen the reports and you will see the 10-Q detail of revenue, the number should we acquire. We did that in this in the early part of this quarter and our strategy is to continue that pattern, because ideally it is better to own more of it, maybe all of it at some point. (Inaudible) - EPS. So, and eventually I think we will simplify the structure with sometime obviously some new -- I don't understand the whole structure, but that is our plan and that is a cash requirement and cash are utilization and the best possible way. So that strategy is ongoing, and keep the market posted with the next acquisitions of shares.

Okay. So we're going to stay on the path basically.

It seem like.

Good. Good.

Okay well those are my questions I appreciate again the good work and your forthright answers and we're all cheering you on on the sidelines here. And (multiple speakers) by how well you're doing so far so. Keep up the good work and thank you.

Thanks.

Thanks. We have a great team here. Thank you.

And our next question will be a follow up from Mike Vermut of Newland Capital. Please go head.

One follow up one. I know a lot of the cash is overseas, but you are trading at 25% free cash flow yield on your cash earnings here. You are trading at, what, five times earnings. It is unheard for a software company in your growth trajectory. Is there point where you say as you get cash in the US you start the buyback US stock? I just it's hard to see evaluation staying at these levels for long.

I think Mike, the question a minute ago about the buyback in peak issues, I believe and the board believes that call is the priority number one in our strategy, and that's what we've done (inaudible) shares: $1.5 million or $1.7 million. So that really will be in the long-term a better approach to have a better control and streamline the structure that with simple and anybody can reach of the line with straight profit is going to the bottom line and not the minority interest taken out. So that will be (inaudible). I think we will make much more sense. And if cash permits and we can do lot of the things to -- that are best for the Company.

Great excellent. These evaluations don't normally last long, so it's an opportunity, but great job. We will get there.

We will get there.

Okay, thanks.

Thank you.

And ladies and gentlemen, this will conclude our question-and-answer session. I would like to hand the conference back over to management for any closing remarks.

Well, thank you again for joining us today. As always, on behalf of our Board and the management team throughout the globe, I express my deep gratitude to our shareholders for their continued support. Thank you and see you next time.

Ladies and gentlemen, the conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.