NetSol Technologies Inc (NTWK) 2017 Q1 法說會逐字稿

Good morning and welcome to the NetSol Technologies first-quarter 2017 earnings conference call. Good morning, and welcome to the NetSol Technologies first quarter 2017 earnings conference call.

(Operator Instructions)

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

Please go ahead.

Good morning, everyone, and thank you for joining us today to discuss NetSol Technologies FY17 first-quarter results. On the call today are Najeeb Ghauri, Chairman and Chief Executive Officer; Roger Almond, Chief Financial Officer; Naeem Ghauri; President Global Sales, and Jeff Bilbrey, President NetSol Americas. 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.

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 statements, 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. 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 press release issued earlier today contains a reconciliation of these non-GAAP financial results to the most comparable GAAP measures.

In addition, I'd would like to remind everyone that today's call is being webcast 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, Patty, and good morning, everyone. Thank you for joining us today on our first-quarter 2017 earnings call.

I will begin my remarks with some highlights from our first-quarter results. The total net revenues for the first quarter were $15 million, representing an increase of 13% from the prior-year period. Our growth in Q1 was driven by new implementation, change requests from existing clients, as well as continued cross sales of additional solutions into our customer base.

GAAP net loss was $1.8 million in the quarter, or $0.17 per share compared with the loss of $400,000 per share, or $0.04 in the prior-year same period. Adjusted EBITDA was just about $180,000 in the first quarter.

We are pleased with our first-quarter results in what is typically and historically our slowest quarter of the year. Our results reflect continued solid demand for our solutions by new and existing customers, and we believe we are well-positioned to deliver strong financial results and operating performance in FY17, in line with our expectations. Overall, I am pleased with the momentum we are building in our US and European markets, and the continued strong results we are generating in our Asia-Pacific markets.

I would like to now provide you with some recent highlights, which demonstrate the progress we are making across our global footprint. APAC continues to be a market of considerable opportunity for NetSol, and in particular, the China. China market represents a significant runway for growth.

As we have mentioned on prior calls, lower regulatory hurdles to form new leasing entities and a growing middle class, which has increasingly embraced leasing and financing options to purchase a vehicle, have increased demand for our products and services in China. This powerful growth trend is driving a meaningful increase in both new client interactions, as well as interaction with existing multi-national customers who are looking to scale in the Chinese market, a pipeline in the region continued to expand through the first quarter across all customer types and we continue to expect to generate more business from leasing companies in China if FY17 than we did in FY16.

I'm also pleased to say that to keep up with our level of growth in China, we plan to double our office space in Beijing and Beijing office, and have already set up a new satellite office in Shanghai market in FY17. And just like Beijing, we see Shanghai as a strong growth market, with nearly 50% existing clients in China.

Recently, we announced a president to head our China operations and to position NetSol progressive growth. NetSol is a de facto leader, a market leader in the Chinese market in the asset finance enterprise software space. In terms of market size of leasing, we believe it is a second biggest market after North America for NetSol.

Our success in APAC, of course, extends beyond just China. As we announced last week, our flagship NFS Ascent solution went live in the New Zealand market for our largest auto manufacturing customer. This is the first implementation in our 12-country NFS Ascent contract with this customer that was signed in December of 2015, and we expect additional market implementations will follow in the coming quarters.

I'm extremely pleased to be talking to you about this today, and want to thank the NetSol team worldwide and our partners for their work toward this implementation, which exceeded all expectations in terms of time to market. This is clearly an important program for NetSol and our customers of course. Not only from the standpoint of helping to transform the leasing and finance operations of one of the largest auto manufacturers in the world, but also because this implementation continues to serve as a strong reference point when pursuing new NFS Ascent wins globally. In our Sydney operations in Austria, we are steadily growing our new clients acquisitions with a robust pipeline.

Turning to Europe, we continue to generate results in line with our expectations, and our pipeline continues to expand in the region despite increased uncertainties related to Brexit. In Europe, as with all our regions, we continue to make strategic hires and organization changes that we believe will improve our ability to further penetrate our significant addressable market. For example, we announced earlier this month that Tim O'Sullivan was appointed as Managing Director NetSol Technologies Europe to oversee our growth initiative in Europe for NFS Ascent.

Additionally, we brought in Chris Tobey as Sales Director for Global Wholesale Financial Solutions, responsible for overall strategy and creating relationships and executing sales for Ascent in the wholesale market. The leadership, depth of experience, and relevant market knowledge that both Tim and Toby bring will be important as we execute on our growth plans.

This is representative of the types of targeted investments we have and will selectively make at NetSol to take our business to the next level. While we also continue to level off the hiring of our development and delivery teams.

Focusing now on the Americas market, the US continues to represent tremendous opportunity for NetSol, which represents a total addressable market nearly equal to the size of the rest of the globe, combined in terms of sales targets. With the addition of Jeff Bilbrey as the President, and other key management hires, we have significantly accelerated our efforts to expand our US business, and I am pleased with the momentum we are gaining. I can say with excitement and that currently we have a nine-figure sales pipeline in North America.

On the product front, we have been increasing our capability and readiness to execute on NSF Ascent deals in the US tier-one market, while also revitalizing some of our solutions to be offered both on-premise or hosted in the cloud.

In terms of market engagement, as we mentioned on our last call, we have increased our marketing and partner channel efforts to grow our visibility in the North American market. For example, we were a platinum sponsor at this year's Equipment Leasing and Finance Association convention, the US equipment finance industry's premier annual event.

We were also a gold sponsor at this year's Auto Finance Summit. We were excited to share the NetSol suite of products and services of these leading industry wins, and also to hear from some existing clients who tell us how much they like our products.

Finally, I would like to share with you how proud we are of the continued recognition we are receiving in the market. Just recently, NetSol was awarded for the 11th year in a row, a leading Company for IT expos in Pakistan by the Pakistan Software Houses Association, or PSHA for short. This is reflective of not only the successful platform we have built, but the strong culture of excellence we have established at NetSol.

With that, I would like now the call over to Roger, Roger Almond to review our financial performance. Roger?

Thank you, Najeeb. I will begin with the review of our fiscal first-quarter financial results. Total net revenues for the first quarter were $15 million, representing a 13% year-over-year growth. Our revenue performance in the quarter was driven primarily by strong growth in license fees related to our new NSF Ascent implementations, as well as recurring maintenance fees.

Total license fees for the first quarter were $3.7 million, more than tripling our $1.2 million in the first-quarter 2016. Our strong performance in the quarter reflects increased license fees from our NSF Ascent implementation in the UK, and the 12-country Ascent contract with our largest customer.

Maintenance fees for the first quarter were $3.5 million, an increase of 11% from $3.2 million in the prior-year period. Services revenue were $7.7 million for the fiscal first quarter, a decrease of 14% from $8.9 million in the prior-year period. The year-over-year decrease in our service revenue primarily reflects a natural completion of certain customer implementations.

Total cost of revenue were $8.9 million for the first quarter, an increase of 11% from first-quarter 2016, primarily driven by higher salary and consulting costs and travel expenses, partially offset by lower depreciation and amortization. Gross profit for the first quarter increased 16% year over year to $6.1 million, or 40.6% of total net revenues, from $5.2 million, or 39.5% of net revenues in the prior-year period.

Total operating expenses for the first quarter were $7.3 million, an increase of 38% from $5.3 million in the same period last year. The increase in our operating expenses primarily reflect higher selling and marketing expenses in support of increasing sales and awareness of our products and solutions, and higher general and administrative expenses related to strategic hires and non-cash stock compensation expense.

GAAP net loss attributable to NetSol for the first quarter of FY17 was $1.8 million, or $0.17 per diluted share, compared with a net loss of $411,000, or $0.04 per diluted share in the prior-year period. Our highest net loss in the first-quarter 2017 compared to the year-ago period reflects the revenue growth offset by higher operating expenses, as well as higher other expenses, including an approximately $300,000 increase in foreign currency exchange transaction losses.

Moving to our non-GAAP metrics, adjusted EBITDA was approximately $180,000 in the fiscal first quarter of 2017, compared with approximately $659,000 in the prior-year period. On a year-over-year basis, the change in adjusted EBITDA reflects top-line growth offset by higher operating expenses, driven by our strategic investments in support of our long-term growth objectives. As of September 30, 2016, cash and cash equivalents were $11.2 million compared with $11.6 million at June 30, 2016, and $10.1 million at September 30, 2015. Turning now to our FY17 guidance, we reiterate our financial guidance provided in the year-end call.

With that, I will now turn the call back over to Najeeb for some closing remarks. Najeeb?

Thank you, Roger. In conclusion, we remain excited about the future of NetSol. We will continue to leverage our best-in-class products and services, leading market position, and strong relationships with hundreds of bluechip customers to drive growth in all of our markets.

In addition, we will continue to make strategic investments across our business, and particularly, in our regional leadership teams to help take NetSol to the next level and realize our next major milestone of achieving $100 million in annual revenue.

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

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

(Operator Instructions)

Howard Halpern, Taglich Brothers.

Good morning, guys.

Good morning.

One, I didn't quite get the figure that you had said for your North American sales pipeline. Did you give an actual number?

Yes, so I said nine figure, that means actually $100 million pipeline, and I think Jeff will give more color as you're asking a specific questions.

With that figure, if you could describe what's the more color would be? What's in the early -- how much is in the early stages, mid-stages, and what maybe could we expect in the next 12 months or so?

Sure, I'll ask Jeff to jump in to give you more detail. Go ahead, Jeff.

Hey Howard, this is Jeff. Thanks for the question.

When we say the nine-figure pipeline, we really have done a great job in the last month of building that pipeline for net new sales. Net represent sales of Ascent, as well as some legacy platforms and it represents sales not just in the US but across all of North and South America as well. So we've really been expanding our footprint in terms of our attempted reach. We've been using a lot of partners to try to help us reach out to additional new sales contacts.

To answer your question about where we sit in terms of the pipeline and penetration, there are some that are very much at the early stages, as you know. In these enterprise software markets, it takes anywhere between 8 and 20 months to close a deal. However, we do have some that are penetrating closer to the bottom of the pipeline, bottom of the funnel, and we do hope to see some of this pull through in this fiscal year for sure.

Sounds great.

In terms of now the investments and adjustments you've made to personnel, what could we expect in terms of operating expenses? Is it going to remain in that $7 million to $8 million area per quarter for the balance of the year?

Yes, let me give you an answer in two ways. One is, of course, the number is just about right. And because we believe that, and as we've said this a few times in the past through this call that we are not hiring the [mass] programmers and developers anymore. But we're focused on, as I mentioned, clearly with, given some names of the new hires, that we're focused on bringing the strong leadership teams, whether they are in the North American markets or in Europe and also even China. And some key [performers] in Pakistan, which really impact our long-term strategy in a positive way. So you will see, from time to time, a well-positioned, well-selected roles that we will use to grow our business to go to bigger markets. And I think that will be an ongoing thing. However, we won't be hiring any more programmers the way we used to in the past.

Okay. So you think that $7 million to $8 million range is a solid range to use for modeling purposes?

Yes. I think so. Roger, what do you think?

Yes, if you look at our cost for operating expenses and you, year over year compare it to Q1, they were high. But if you compare those to Q4, they're right in line with what our expenses were in Q4. So we think that's probably a pretty good number to model going forward for FY17.

And one final one, in terms of you expecting implementations now from the large contract to continue throughout the year, can we expect you to be able to drive gross margins towards that 50% area?

Well, that is our goal. We did 47%, 48% last year, and Q1 was low, because of the low revenue, which was expected. But we have achieved our numbers to the top line; I think that will be in line with our gross margins, the goals to meet 50% or so.

Okay. I look forward to the balance of the year. Thanks, guys.

Thank you. Thank you, Howard.

Scott Reed, Vict10n Capital Strategies.

Hi, good morning, gentlemen.

Hi, Scott.

Good morning, Scott.

So two questions: first off, it looks like, well normally, I should say, I expect to see license and service revenues move in lock-step as you complete projects or as you do your initial implementations. And this quarter they seem to have diverged. You had real solid growth in licenses, but services revenue seemed to lag a little bit. Is that indicative of a longer-term trend?

You can answer, Naeem, if you want to, or Roger. Either one of you is fine.

I will jump in.

So Scott, as Roger said, when we're getting to some closure in some of the projects, we can pick up the license fee and we did deliver a very large project in Thailand, the Isuzu, the [news release] that we did. So really, it's -- you can't really have a straight line on this. What you would have out here is where one will exceed the other. But certainly, the trend would be that services should grow, because we are undertaking this very large program in Australia, Asia-Pacific. As we move forward in the program, service delivery will increase and the revenue should also follow.

I see, very good.

My next question also ties back to the maybe lumpiness in revenue, as well, regarding specifically, the recently announced New Zealand portion of the Daimler contract. Could you comment on the relative size of those revenues relative to the overall contract size? Or at least the service and license and service portion of the contract? And maybe also how that might affect your revenue recognition in your fiscal Q2 specifically, which is also a question about whether the revenue has been recognized more smoothly over time or if we should expect to see a larger portion of revenue recognized this next quarter?

I think -- (multiple speakers)

I will answer one part; actually the larger program is a little bit more normalized in terms of how we're recognizing revenue. So that one, as we got a pretty much a straight line in terms of how we can recognize revenue, because we are working on percentage of complete. And it is a long-term program. So we had to come up with a schedule that is right for this type of revenue.

So you'll find that revenue to be quite smooth in terms of license and maintenance. However, the services part will spike or otherwise from time to time, but generally moving in the right direction because we are only at the moment engaging with four of the countries. We have another nine to go within five years, so that is certainly going to spike. And the biggest of those is China, which has already started but it still has another year and a half to go. So a lot of that revenue should also come in a little bit back-end loaded. So I think from the license perspective, for the large program, it's going to be very normalized and smooth, but in terms of other contracts that we sign, that's your typical -- we take only a small percentage up front and then we recognize bulk of it towards the end.

Great. I think that'll do it for me. Absolutely. Thanks a lot guys.

Thank you.

Thank you.

(Operator Instructions)

Michael Vermut, Newland Capital Management.

Hello, guys.

I missed the beginning of the call, so just to follow on that last question, should we assume throughout the year now, it's sequentially improving? Is it $17 million, a $20 million, a $23 million? Or is it more constant second, third, and fourth quarter for modeling? And then I have a follow-up as well.

Well, I think, as you know, Mike, Q1 is the slowest quarter historically, and the trend is that it does improve sequentially Q2, Q3, to Q4. The main thing is, we have given the top-line guidance and we'd like to hit those numbers. So I think, yes, it should improve each quarter going forward.

Excellent. And then, just some look into, looking out into 2018, 2019, 2020, when does that start unfolding? And I assume you already have a portion that is booked for 2018 already, that you have a look into that from the current contracts, the maintenance. How much, roughly, is that, that you have in hand for a 2018? And how much needs to be won going forward? Just so, what's your base business and how is that step functioning up year to year?

Okay. Very good question. Naeem, you want to answer or should I answer, Roger?

I can do one part and maybe Roger can give the other part. Look, Mike, the way that this large program works is that we are in the first five years. We are still at the lower end of the revenue. So overall, the 10-year program is $100 million plus. So I think in the year that we've signed the contract, we have probably only picked up maybe less than $10 million. Roger will correct me if I'm wrong, but I think it's roughly in that area.

So I think there's a long way to go and there's a lot more revenue to come. Although, we are not trying to create a schedule where the revenue is more normalized. But there's still lots of upside on services. And then, year five and that finishes, we have a 70% jump. So we have now completed year one. So in four years, we'll have a huge jump in our yearly revenue, because that's part of the contract also. There's a fixed part of that revenue that comes in. So I think there's a long way to go yet, Mike, so we're only just starting this.

Excellent.

And then so, right, so we have very good visibility going out two, three, four, five years. And then the other question is, can you give us a good read or a look into some of the pipeline: the bidding activity, what the US looks like, what Europe looks like? Not necessarily how much is out there, but the type of contracts that we're looking at, the range of size that we're looking at, new customers, existing customers, just what's out there? And then also if you can touch on the margin differential for the US and European contracts, as those are landed, what that does to our margin outlook?

There's a lot of questions, let's break them one at a time. But just generally speaking, but I'll have again, Naeem and Jeff come back. But generally speaking, as you can see from our sales and marketing activities and some new hires, our activities are really surging in terms of building pipeline and effort to close them in the respective period.

So really busy in all the markets all over the world. And that is a very positive trend. I think that's exactly how you see is reflected in our cost line, but it is all investment. But Naeem can give you some color on APAC and Europe, and then again, Jeff will come back to give you some more details.

In terms of pipeline, look, I think where we are today, what is happening in Asia-Pacific, and Jeff will tell you US, but certainly in Asia-Pacific, their new markets, which have just come out of nowhere, like Indonesia, where it's flood gates have opened and new interest, since we've announced that deal with our large contract, which is certainly close to going live. And in fact, one part has gone live. So that was our $60 million deal that we signed 2.5 years ago. On the back of that, the [reference ability] that has happen, that has just opened a whole new set of clients which we just didn't know even existed. This has come in, and so there's a lot of activity going on in Indonesia, which as you know, one of the largest markets in Asia, next to China. And then, we're looking at some of the large auto captives from Europe, who have also looked at the large program that we've done for the other clients. There are a couple of companies in Europe who are similar size and scale, and they're as big in Asia.

So we are now in the process of bidding for a couple of programs for those types of clients who are similar in size to the one that we signed. So we are at a 30%, 40% completion at the moment. So we have still a long ways to go. However, in Asia as we all know, NetSol is the market leader, so we are the first stop for these clients.

Now, in Europe, we have one large client which is going to go live in the next couple of weeks with the contract that was signed the first [press release]. On the back of that, we've had two other clients come in, and we are now in the RFP stage. So between Asia and Europe, there's a lot of traction. You see a lot of the travel that's happening as a result.

And the other thing I would just mention here, which is on the revenue side, this quarter, as you mentioned, is historically the lowest. But this is our record number. We never did $15 million in Q1 ever. So it's really now the benchmark and the bar is higher, and our cost basis pretty much static to what it was in Q4. So we have scaled the organization, we optimized it. We're keeping the costs in check, but the revenue is continuously moving on the right direction.

Jeff, please feel free to jump in on the US.

So, Jeff is about to jump on the plane, so he can come in and answer the question. Go ahead, Jeff. You have a lot to say.

Yes, sure. No problem. Hi Mike, good morning.

I would say, I'll take a slightly different slice of the question and just answer, in the Americas here, the markets that are opening up to us in terms of pipeline. That is, that we tend to focus on, or a lot of companies in this space focus on either equipment finance or banks or automobile captives. And we have an all-of-the-above strategy; not because we're trying to cast a wide net, but, frankly, because those are the opportunities that are very near and present for us. So we're doing pretty well in all three of those key verticals, if you will. And we have some in the tier 1 range that are in the pipeline, as well as I'd call tier 2 and tier 3 deals. The smaller deals are definitely going to be more of the SaaS and cloud opportunity. And in fact, the last two clients that we signed in the US were SaaS clients.

Got it. And then the pipeline, the size of the pipeline, any comments on that?

Well, go ahead, Jeff. Please.

No problem. I think we answered that one before. We've grown the pipeline from pretty small to over a $100 million pipeline now. So obviously, not all those things mature on the same day or at the same speed, but we certainly have enough volume in the pipe to portend a good opportunity for us here in this market.

Great. Okay. Guys, I'll go to another question here.

We're trading now at 0.6 times our revenue estimate, right? We're trading at 4 times a true cash earnings. Is there a point when we look, and there becomes a risk, a not risk that someone comes in and no other SaaS-based software company trades at these multiples, right, that's pretty clear. So is there a point where you take some cash? We have enough cash on the balance sheet, and you say, this is an opportunity here at absurd multiples to start buying back stock here in the US?

That's a discussion point all the time in this Company, and we can be positive about our fundamental approach to keep the business and the way it should be, the way it's growing. And I think we've also beefed up the marketing activities in the (inaudible) invest in the new funds and [some analysts]. So I can't say when we're going to do this, but this is not -- this is an ongoing discussion, and again, it's always based on how best you can use cash. And understand, totally, believe me, I'm just like you and all of the shareholders, that we are we are very undervalued stock. We know that, we fully acknowledge that, and will continue to do what we can do to improve the valuation coming days and months.

Great. Okay. All right. Well, hopefully this year continues. Thanks, guys.

Thank you. Thank you, Mike.

Thank you.

Scott Reed, Vict10n Capital Strategies.

Yes, one more quick one, guys.

Just as I look at your outlook and your guidance for the year, it seems that you're projecting some pretty solid growth in revenue, but EBITDA, you're really maintaining pretty flat with the last fiscal year. And could you give us a little bit of color on how we should think about that in addition to your cost structure? Is that really investing in North American sales type of market? Or should we think about that some other way?

Well, just to recap again, Scott, and I said in my prepared remarks we are investing quite nicely, I won't say heavily, but nicely, to keep up with the growth vision in North America specialty. We brought in some senior people; Jeff is the most senior we brought in. He came from our Board, and he joined the management team. And he's got a mandate to really execute upon the NFS Ascent and go beyond North America to other Latin America markets and some opportunities there.

Same thing is happening in China. I just came back from China last week and I was very excited to see our customers. And the visibility for our new potential customers in across China in four key markets, especially Beijing and Shanghai. So we are continuously expanding there. We just decided to double up our space in Beijing, and then of course, we have a small office in Shanghai. It shows that our opportunities are a lot more in China. Then we have shown actually we can double our revenue in China the next two to three years time. And Naeem gave a pretty good color on the European market.

So all in all, we'll continue on a well-thought-out strategy basis and to grow our business in a way that we can also improve our bottom line. There will be a point where you have enough scale to support big numbers in all the markets. So we won't be required to spend any more money as we go forward.

Great. Thanks a lot.

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

Thank you very much. I appreciated you joining us today. We are very bullish; we're really excited about our future outlook. As always, on behalf of our Board and management team throughout the globe, I want to thank our shareholders for their continued support.

Operator, you may end the call. Thank you so much. Have a good day.

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