NetSol Technologies Inc (NTWK) 2017 Q2 法說會逐字稿

Good day and welcome to the NetSol Technologies FY17 second-quarter conference call.

(Operator Instructions)

Please note this event is being recorded. I would now like to turn the conference over to Patti McGlasson, General Counsel. Please go ahead.

Good morning everyone and thank you for joining us today to discuss NetSol Technologies' FY17 second-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 up the call 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 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 10K 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 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 Patty. And good morning everyone. Thank you for joining us today on our second-quarter call. I will begin my remarks with some highlights from our second-quarter results.

As you will see in the press release, the net revenue for the second quarter was $17.6 million. And [presenting] an increase of 9% from the prior-year period. Our fiscal Q2 revenue performance was driven by strong growth in our license and recurring maintenance fees reflecting new implementations as well as continued cross sales of additional solution into our customer base. Now adjusted EBITDA was $1 million in the second quarter and GAAP net loss was $986,000 in Q2 or $0.09 per share loss.

So let me discuss some of the key drivers of our growth, future growth, and how we plan to deliver strong fundamental results with meaningful margin expansion and increased earnings accretion over the next two years. Focusing first on our growth drivers.

Most importantly, we continue to see tremendous opportunity for revenue growth driven by our industry-leading interface Ascent solution. Presently, we believe every single one of our major multinational clients is a potential target for an upgrade to NFS Ascent from legacy and NFS Systems. While our customers businesses continue to grow, we believe they will have a greater need to transition to our NFS Ascent solution to address their need for a more robust platform that has abilities to manage much higher volumes.

We can expect the conversion rate to NFS Ascent within our existing customer base will increase in 2018 and 2019 years. The successful implementations we have completed so far are acting as strong reference points when engaging our current customers and the number of active conversations we're having today with our clients regarding upgrading to Ascent is very encouraging. We believe conversions of our existing customers to NFS Ascent alone will be a very positive growth driver over the next two years.

And our pipeline is not limited to just our existing clients. We also currently have a solid pipeline of new logos for Ascent which includes a few top-tier [auto captives] in North America, Australia, Germany, and Indonesia and in some cases, we have made very exciting progress during the recent meetings and demos.

In one case we're dealing with one of the largest solvent companies in the US In additions to potential growth from selling NFS Ascent to existing and new clients, we will continue to benefit from three major Ascent contracts we have already signed in the last two years and they were already announced, which have a total aggregated contract value exceeding $130 million. That is $130 million including maintenance, and will contribute to our top line growth over the next several years.

As you can tell, we are extremely excited about NFS Ascent, especially given that the solution carries contract values significantly above those of our legacy systems. As with any new product release, meaningful penetration can take time, nevertheless, we're seeing continued interest from multinational auto captives, global equipment finance companies, banks, and existing customers for NFS Ascent. And the level of demand and number of ongoing conversations we are having with new and existing customers gives us confidence in the long-term growth of the solution.

From a legal perspective, we are seeing solid demand across all our markets and continue to make targeted investments to expand our presence and share. Both our core and new markets have been steadily growing organically, and we expect will continue to our top line.

Overall we have ramped up our efforts and investment in the Americas market adding additional senior managers and introducing new solutions to penetrate to the biggest (inaudible) market in the world. We believe we're very well positioned in the US market and anticipate at least one new win in FY17 and we're building a stronger pipeline for FY18.

Now the China market is continuing, it's overall strong growth --growth trend in the auto sector as the number one market with sales over EUR23 million in 2016, it far exceeds the US markets. NetSol continues to be a [factory] leader in China with almost 30 clients including both multinationals and local Chinese companies.

In China, we expect future growth to come predominantly from client conversions to NFS Ascent, as well as from new customer acquisitions on legacy NFS system. To meet the fast-paced business dynamics of the Chinese [leasing] market, will recently moved to a bigger office in Beijing to have the necessary infrastructure to support our growing needs in that country.

In addition, we recently set up a small satellite office in Shanghai to expand our outreach in China. While we service [top] lines from Shanghai, we have a growing new pipeline in that region.

Looking at our other Asia-Pacific markets, we establish a low cost share office in Jakarta, Indonesia a year ago. As a result, we have developed a new pipeline for Indonesians fast growing leasing economy.

In Australia we have further consolidated our team with senior sales and client relation managers. This is a very promising market, with a robust pipeline and five listing major clients.

In Bangkok, our business is growing in new areas such as banking and in auto captive space. Finally, in our world-class global delivery center in lower Pakistan we continue to host many new potential business partners from Asia demonstrating a willingness to visit and to do business in Pakistan.

Now I want to address a new productivity and cost reduction initiatives that we initiated recently. Over the past three months, and more significantly in the months of December and January, we have instituted specific measures aimed at increasing our productivity and reducing our costs across our entire position in order to position NetSol for improved margin, to be more competitive and earnings accretion. Our decision to do this was in direct response to our strategic goal of better aligning our business for long-term profitable growth.

As a result of these initiatives, we anticipate generating $4 million of annualized cost savings that will begin to reflect from fiscal Q3 and onwards. We will continue to evaluate further opportunities for cost reductions through consolidation and streamlining our global operation while balancing our investments to support our core business and fund our growth initiative aimed at accelerating market expansion. We believe this is the right strategy for both NetSol and our shareholders. NetSol is committed to becoming leaner, more nimble, and to significantly improve our revenue and net income per [employee metrics].

Before turning the call over to Roger, I would like to discuss our current stock market evaluation. We believe our current market value does not reflect the strong fundamentals and growth potential for our business and is well below the intrinsic value of the Company.

The founding management team and our colleagues are fully aligned behind one vision of strong, profitable growth and a commitment every day to build significant shareholder value. It is our belief that as we execute against this vision, and continue to share the NetSol success story in the market that our stock market value would benefit.

As the [Founding Chairman] I am fortunate and excited to be serving this great Company. This is all what we do with focus, belief and passions every day.

With that, I will now turn the call over to Roger Almond to review our financial performance. Roger.

Thank you, Najeeb. I will begin with a review of our fiscal second-quarter financial results, then I will turn the call back over to Najeeb for closing remarks before opening up the call for your questions.

Total net revenues for the second quarter were $17.6 million, representing a 9% year-over-year growth. Our revenue performance in the quarter was driven primarily by strong growth in both our license fees related to our NFS Ascent implementations, as well as recurring maintenance fees. Total license fees for the second quarter were $5.4 million up significantly from $0.7 million in the second quarter of 2016.

Our strong growth in the quarter primarily reflects increased license fees in the 12 country Ascent contract with our largest customer and sales of our regional offerings in the US. As Najeeb mentioned we are on track with our 12 country NFS Ascent implementation with our largest customer.

Maintenance fees for the second quarter were $3.8 million, an increase of 17% from $3.3 million in the prior-year period, primarily driven by new customer agreements that went live with our products during late FY16 and into FY17. Services revenue were $8.4 million for the fiscal second-quarter, a decrease of approximately 31% from $12.2 million in the prior-year period. The year-over-year decrease in our services revenue primarily reflects a natural completion of certain customer implementations, a decline in change requests, as well as lower revenue generated from our NetSol innovation joint venture with [One Ensure].

Total cost of revenues were $9.2 million for the second quarter, an increase of 11% from the second quarter of 2016, primarily driven by higher salaries and consulted costs and also travel expenses and they were partially offset by lower depreciation and amortization. Gross profit for the second quarter increased 7% year-over-year to $8.4 million or 47.8% of total net revenues from $7.9 million or 48.6% of net revenues in the prior-year period.

Total operating expenses for the second quarter were $7 million, an increase of 21% from $5.8 million in the same period last year. The increase in our operating expenses primarily reflects 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, partially offset by lower R&D costs and depreciation and amortization.

GAAP net loss attributable to NetSol for the fiscal second-quarter of 2017 inclusive of minority interest was $986,000 or $0.09 per diluted share, compared with the net income of $875,000 or $0.08 per diluted share in the prior-year period. Our fiscal second-quarter net loss compared to the year ago period, was impacted primarily by lower operating income and approximately $500,000 increase in noncontrolling interest driven by the mix of profits between NetSol's wholly owned subsidiaries and joint ventures; and approximately $500,000 in increase in loss from foreign currency exchange transactions primarily due to the decrease in the value of the euro and the pound and $100,000 of lower other income.

Moving to our non-GAAP metrics. Adjusted EBITDA was approximately $1 million in the fiscal second-quarter of 2017 compared with $2.6 million in the prior-year period. On a year-over-year basis, the change in adjusted EBITDA reflects topline growth, offset by higher cost of revenues and higher operating expenses driven by our ongoing strategic growth investments. At December 31, 2016, cash and cash equivalents were $9.5 million, compared with $11.2 million at September 30, 2016, and $14 million at December 31, 2015.

Turning to our cost savings initiatives, as Najeeb mentioned, we have taken a number of actions of the past three months which are aimed at reducing our operating costs and increasing our overall productivity. We currently expect these initiatives to result in approximately $1.5 million in cost savings in the second half of FY17 and approximately $4 million on an annualized basis beginning in FY18. We expect to incur restructuring charge of approximately $100,000 in our fiscal third quarter as a result of these actions.

Now moving onto our guidance for FY17, we continue to expect total net revenues of $73 million to $75 million. We are adjusting our FY17 EBITDA guidance range down to $9 million to $10 million based on lower than expected fiscal first-half 2017 EBITDA results, partially offset by cost-saving initiatives we discussed earlier.

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

Thank you, Roger. So as I reflect on the first half of the FY17, I would like to highlight a few points here.

I would like to share some very positive developments in Pakistan, home to our global delivery center. According to a Bloomberg report by Tyler Cowen on February 6, 2017, the Pakistani economy has surprised the world, it's GDP is expected to cross 5% from a stagnant 4% in the last few years. The Pakistan stock exchange index has crossed 50,000 points on a rise of 46% last year, along with many of the positive indicators of foreign direct investments and state bank reserves in dollars have [since] also grown.

Also, due to a Chinese investment of now over $55 billion in infrastructure and powerplants, Pakistani economy should continue to offer new opportunities. Finally, the [Jupiter] development over the last two years has made Pakistan a much safer place to the business. We believe that these indicators have contributed to the Pakistan market run-up, which has caused NetSol's Pakistan share price to rise steadily in the last few weeks, thereby boosting the value of NTI which owns 68% ownership of NetSol Pakistan shares.

In conclusion, first demand for our product and service remains solid and the level of demand and activity we are seeing with NFS Ascent is highly encouraging. We believe we are well-positioned to generate improved revenue growth performance in the second half of FY17 versus the first half. Secondly, our productivity and cost reduction initiatives will drive the meaningful margin expansion and additional EPS accretion beginning in the second half of 2017 and accelerating in FY18.

We will continue to make targeted investments across our business that are focused on capitalizing on significant market opportunity for our solutions. At the same time, we are carefully reviewing our costs, with a specific focus on optimizing them in order to drive a mentality of long-term profitable growth for our business.

And finally, I remain very optimistic and ambitious about the future of NetSol. We are an industry leader in a large and growing market. We will continue to leverage our leading market position, broad solution set, and strong relationships with 200 plus blue-chip customers to drive toward our mid-term goal of achieving $100 million in revenue with strong profitability.

With that, I would like to open the call up for questions, operator.

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

(Operator Instructions)

Howard Halpern, Taglich Brothers.

Good morning. Nice, solid quarter. In terms of the productivity alignment and how we should look at, both in the second half and going forward into 2018, what do you envision the breakdown between improving gross margin and then improvement in operating expenses from those numbers that you provided?

Thank you, Howard. For the gross margins, as you have illustrated that we have taken initiative to improve our cost structure across the board. That means when you look at the cost of development, we are not going to hire any more technology people, at least until we hit some major revenue breakthrough, which we will eventually in a shorter period.

So I do not believe there is going to be a drop in the margins. If anything, it will improve onward. I think we believe it will be about 48% in Q2. So I am anticipating to exceed 50%, in the 50%s, in the coming quarters.

Secondly, we also look at the sales activity, with the cost of sale, which is mostly travel and meeting with clients. That activity is actually on the rise. As a result, we have seen a very impressive pipeline in the US and Asia-Pacific and in the UK market. So that will grow steadily.

But we will be very efficient how we manage our expenses, so we continue to improve our gross margins. I'll let Roger come in and talk about operating expenses.

Yes. So, Howard, what you're going to see is, I think in a lot of the change or what were going to be in our cost savings is going to be coming out of our Pakistan office. And a lot of that is going to be with those that we've hired in our R1 or legacy product. And we do not need as many people, so those will be let go. So you will see a decrease in our personnel from that standpoint.

Also, in this selling and marketing, as Najeeb said, that will probably increase. But then other general and administrative expenses will decrease a little bit, as we continue to look at cost cutting in those areas.

Okay. Now, getting to your pipeline, and it is an exciting pipeline that you described, especially with, I think you had mentioned earlier that you anticipate hopefully in FY17 one new win in North America. But could you describe, based on the pipeline either in terms of dollar amount or number of clients, how far along in the pipeline or if you could segment them out somehow to say how many are close, how many are just starting, if you can give a profile on that?

Yes. Naeem will give good color on impact in maybe Europe, then followed by Jeff who will give you some perspective on the US market. Go ahead, Naeem.

Yes. Hi, Howard. The way we do our metrics on where we are with different opportunities is to see how many different opportunities we are at the preferred vendor stage. So this is how we are able to separate the pipeline from something which is imminent to others which are more medium to long term.

And so in terms of imminence, opportunity, and where we are short-listed or preferred vendor, I would say we [strong is two] of them which are multiple-market, multiple-country opportunity. So we our preferred vendor in at least two of [these are] opportunities that go all across Asia. And in the US, Jeff will give you more detail. There is a one that we have had confirm as a short-lister, too. And there will be maybe one or two others that Jeff would like to share with you.

Okay.

Jeff?

Hi, Howard; Jeff. Good morning. With reference to the one sale from NTA that Najeeb mentioned, and Naeem also alluded to, we have a, as we've said in past calls, a very healthy pipeline here in NTA. We have been doing a good job of making sure we have put a great team forward on these sales calls. And, yes, we have had a lot of sales pursuits.

We've got some that are penetrating very deep into that pipeline. And we are down to what we know as the last two vendors in a couple extremely significant ones. One being a top five global software and tech company looking for a new solution. Another one being a household name equipment finance company -- equipment manufacturer and finance company.

So we are doing a pretty good job. We're pretty excited about what we have. We remain cautiously optimistic on these. But we do think that these or some other ones are definitely going to come through in this fiscal year yet.

Okay. I will hop back in the queue.

Thanks.

Michael Vermut, Newland Capital.

It's great to see the top-line growth continuing, and the focus now on the margin side. Looking forward, it's great to see the pipeline currently. What do you see developing, and has anything changed at all on the growth outlook into FY18, FY19, and beyond?

Yes, I think, no, nothing has changed. If anything, it is more positive, believe me, if you look at the pipeline activity, especially in North America. A year ago, we did not have the team that we have now under the leadership of Jeff Bilbrey in the US. And that has really brought some tremendous new prospects and major blue-chip potential customers. So I think that is very encouraging.

And as you know, for years we have been planning to really position the [US] market and especially with the new product, Ascent, but we needed the right team. So Jeff has six, seven key people who are supporting the front line.

Same thing goes with Asia. I mean, the numbers are very encouraging in China and Indonesia, and Australia I just mentioned.

So I believe we are pretty confident for a continued strong growth in the coming years. I think Naeem could add some more; I'm sure he's got a little more color on the growth prospect.

Yes. So, Mike, actually this is really quite an important time in our Company in terms of how we're tracking and how the solutions that we have are being recognized in the market as the go-to solutions. So, literally we get invited to every RFP and every tender that's out there. And any tender of any meaning or size, we are always invited to participate. This was not the case, let's say, five years ago.

So, as a result, we are able to focus on the really big opportunities where we are able to use our scale across the globe. I think we are probably one of the few companies, really the only company, in our space that has the footprint across the US, Europe, and Asia-Pacific. So a lot of the clients' prospects are looking at those kind of global vendors. And some of the opportunities we discussed earlier, they are purely because of our scale and size, and our market leadership that they invite us.

And so I think the growth prospects for the second half, I think we are very strong on where the opportunities are. Sales cycles, as you would know, are unpredictable. But yet enough in the pipeline to hopefully close the right deals to be able to bring the revenue in within the fiscal.

Going forward, 2017, 2018, I think we are going to probably wait for the time to give you some more visibility on where we are going to be heading. Certainly, I do not see any slowdown or anything to suggest that the growth is slowing.

Great. Can you give us a little look into -- you gave us the size of the pipeline, but when we're looking into the Americas and into Europe, what is the size of the deals we're talking here? Are we working on $4 million deals, $20 million deals, $40 million deals? What should we expect if they come through?

Let me just give you an idea of how we -- sorry, Najeeb. So how we separate the deals is that, in terms of our legacy solutions which is the older platforms in the US lease-back and then in the UK lease-up and R1, they typically are between the $1 million to $2 million range. Then we have the two types of deals for Ascent, which are between let's say $4 million to $6 million would be our mid-tier, so anybody who wants Ascent would have to spend at least that much.

Let me add the first year. The majority of our pipeline that you see is the first year. And they are typically clients who have spent upwards of [$20] million. And this is $20 million over the three years cost of ownership.

If you extrapolate that and go further than that, you can go 5 to 10 years. A10-year deal with a client that size is worth $60 million to $80 million, okay? So that is the kind of numbers we are extracting at the moment.

The pipeline tells you more about the deal splits. It does not tell you the 10-year cost of ownership, it tells you the moment the opportunity we're tracking over three years. If they all close, we get $150 million. But then you know everything does not close. We do not get that kind of penetration. But if we close, I'd say 20% of this, then over three years you get that number.

Right. Are we going to assume a couple of the US deals are those $10 million, $20 million, $30 million type deals that you're working on?

Jeff, maybe you might be able to share more info on this? I think we need to be careful, but I will let you.

Yes, I will take Naeem's lead on the careful aspect of that. But these are not going to be small deals, Mike. We have -- there are some pretty good-sized deals with some major companies. They are global companies starting footprint here in the US with [our sale]. But it can expand from there. So when we refer to a long-year relationship, long-year deal, and of course, bigger valuations of those deals, that is kind of what we're talking about.

Great. Okay. Two more questions, guys, and then I will hop off. I know to attract the talent in North America and Europe, there was a lot of stock grants over the past few years. And we had to bring the talent in, and there has been good amount of dilution over the past four years in the Company, rightfully so. What is the compensation structure? What is the incentive program, rough idea, in the US for the US-based team, and the European-based team, the new hires, to make sure that these goals are accomplished? And are they being aligned now with shareholders so that the incentive is there to get these deals closed on the right margin, et cetera?

Okay. Let me answer this question, Mike. So just speaking overall structure we have for the compensation, remember, we are a technology company for many, many years we have been trying to lure a very good talent all over the world. And whether they are in US, UK, or Asia, when we bring senior managers like Jeff and Doug [into the whirl], we bring them with incentive that they have shareholding or options. Or, of course, sale team will get commission on a Company policy that we have that Naeem has under his belt.

So it is important to incentivize people who leave their jobs to come to NetSol because then they have an opportunity to really do well financially if they perform and deliver the strong [BPIs]. So share grant is really in line with what we believe with our goals are, long term. And, yes, last two years we have been trying to bring a lot of talent. One reason why we probably one of the lowest turnover in the Company. We have done very well in terms of holding good talent worldwide.

Second thing, I think I do not anticipate same percentage of shares contribution going forward. Because we don't think we're going to hire any more senior management in the Company. We have enough team worldwide to really deliver our vision, so it should be a much more I think a bit more less than the past three years, coming years.

Great. Okay. And then the last question, and then I will leave you. We are trading now at, I do not know, $45 million, $50 million market cap. We have probably $150 million just in a couple of deals signed, about $1 of cash, we are below tangible book.

It is a worry of yours? Is it a thought that, and there's so much interest now in Pakistan, in Asian software companies, that a suitor comes along, whether a strategic, a private equity buyer, it is so attractive right now with the talent you have, with the backlog you have, a profitable cash flow-generating company, that occurs?

Well, you know, no one can predict anything in the equity market, especially given, you are right, we are very, very undervalued stock. I know that and we are doing everything we can. But we need to do a better job as a company to reach out to fund investors. We used to have a lot of funds a few years ago, but in the transition from legacy to Ascent, we lost some good funds. So I'm pretty sure we can attract them back.

And look, we're focused on business, and we're focused on delivering strong results. And as this Company continues to deliver steady growth in the coming years, with a much improved bottom line, I think stock will respond back.

And look at the case in Pakistan. Of course, it's a different market altogether, simply because there is new investors coming in Pakistan looking for the [steal] and there's only 300 companies listed there. We have thousands listed in the US market. So we have a little bit of the different -- it's like in the US it is difficult to get. But we will eventually get fund managers and analysts to really look at our Company and give us a better valuation.

I would also push as well -- I know you own stock and your brothers own stock. I would push other management, newly hired management that does not own stock to be out there buying shares at this level, personally, as well as the Company.

(Inaudible) so we can't tell them. But the managers, they do a great job. They do a great job in building this Company and we really need them to do what they are doing.

Okay. All right. Well, keep it up, guys.

Thank you.

(Operator Instructions)

Michael Zelvin, Brill Securities.

Hi, gentlemen. It was a decent quarter and I really look forward to the cost savings, and I really liked Mike's questions. He actually covered a lot. I suppose the one question I have left is, and this will give me some sense of how you look at these things. How much of the projection that you have made for the rest of this year is new business?

Yes. Naeem, you want to answer that? Thank you for asking the question.

Yes, so, you probably saw the new license sales in terms of license revenue. We are starting to really pick up steam on license. And license revenue is typically new business. And in this case we're picking up a lot of the license revenue from our big deal that we signed last year.

So I see if you look at the second half, we're looking to close at least two deals in that time frame. So let's say 40, what is it, 3 months and about 4.5 months. So if we close two deals, you would see typically at least that much license and more. So you probably say the ongoing license [if it picks up], it is recurring, and then on top of that we can pick up an equal amount. So you can do your math from there.

Okay. That is very helpful. Thank you, gentlemen.

You are welcome.

Okay.

Howard Halpern, Taglich Brothers.

One last one: Do you have any, as part of what you are doing going forward, especially on the income statement line, are there any planned or programs in place to mitigate maybe foreign currency fluctuations, and some way to balance the non-controlling interest fluctuations that have occurred?

Yes. I think Roger has done some work. Do you want to come and answer, Roger?

Yes. Howard, we have looked at a couple of different areas. The problem is that the foreign currency transactions are occurring basically our Pakistan entity; that is where you have the biggest exposure. In trying to, we've had a couple of people come in and look at different programs that we could use to hedge. And basically both of them have come back and said it doesn't make sense. The rupee isn't kind of like a good -- something that you'd want to hedge, not like the US dollar. Everything were here in the US and we were doing everything from the US, it would be a very easy hedge. But trying to hedge the currency of the rupee, and it would cause more problems than probably what we would gain.

If we look over the history of it, we have actually benefited from not hedging. If we go from last six years, seven years, we have actually done very well by not hedging. It is just these last couple years in which the euro has dropped, and also the pound has dropped.

So it is an issue that we have looked at. We are hoping that now the pound and the euro have leveled out, and so that we won't see those huge transaction losses on our financial statements. But again, to reiterate, we have not found a product that would actually work in assisting us with that hedging of the rupee against those foreign currency transactions.

Okay. Any way to try to balance the non-controlling interest fluctuations?

Yes. That becomes in where you are deriving your revenues from. And, for example, if you are able to get it from China or Bangkok or Australia or even the US, then you are able to pull -- those are 100% owned entities. So, therefore, we would have less non-controlling interest going out.

On the flip side of that though you do have taxable entities. There are taxes that you're going to have to pay. Right now the Pakistan entity is on a tax holiday for next couple of years, in which there is no taxes on outgoing services. There are taxes on internal services provided within Pakistan, but not on these outgoing services. So we do have a tax holiday, which is beneficial.

So we do lose on the non-controlling interest, but we do save on the taxes there. And so if we move into another entity, we then do have to pay the taxes in that jurisdiction. So you're balancing the two, in which makes the most sense for the Company and looking at it at a global entity there.

Okay. Thanks.

Thank you.

[Timothy Stados], private investor.

Good morning, gentlemen. I own about 150,000 shares, including affiliates. I would be the third largest shareholder if I'm a 13F filer. I would like to ask you to address something that the marketplace I think needs to hear.

I have been a big believer in your strategy, and the team here. But can you please explain, because these are the things that, if you want to get more investors in the stock, that they need to hear is the question of credibility. Let me specifically say, we lowered our guidance from $13 million to $14 million in adjusted EBITDA for the year down to $9 million to $10 million in one quarter, last quarter compared to this quarter. And we're going to have $1.5 million in cost savings in the back half of the year. So that is a net swing of $5.5 million.

And, Najeeb, I'm wondering if you or Roger -- I'd prefer that you, Najeeb, can explain how even with $1.5 million in cost savings come in, we have a $5.5 million swing lower in our adjusted EBITDA estimates. Shouldn't that estimate have been lowered last quarter? That is a huge swing and it makes investors fearful. Can you speak to that? I think that's a credibility issue that people on the street need to have reassurances.

And I will also say I was disappointed I do not see that any stock was bought back. When you announce a stock buyback, and the stock is down on an earnings release a quarter ago, when management is not stepping in, you can say you believe your stock is undervalued, but if you do not step in the marketplace and you have $10 million plus in cash laying around and a strong balance sheet, it also creates credibility issues. Can you please speak to those two issues for me and for everyone?

Sure, Timothy. I appreciate your questions. So let me answer the first part about the EBITDA. Look, I think we said clearly in the Q1, we were really investing and brought some senior talent in the Company. That was pretty much (inaudible) three different locations, including US primarily.

Last year we did not have these [overheads]. Because now we have it. We have a solid team in place and that is all cash going out of the top line. It affected us in a positive way, but also of course it affected on a EBITDA [reduction].

I think we believe that this, the initiative taking to the cost-cutting is a very long-term strategy. It is not just a reaction if we want to just improve quarterly. We want to improve the cost structure baseline throughout the Company. We're doing a lot more things. This is Phase 1.

We concluded last month we have another Phase II, which is happening right now. And looking at more strategically how we can really create a much more efficient, much more profitable global structure where you can have a much healthier bottom line. Quite frankly, our internal goal is to have 30% net income at some point, which eventually we will get there.

Did you say 3%, Najeeb?

30% net income. We want to be able to achieve that target at some point. That is the internal goal of the Company. We are [our own KPI between CU and all the key management]. And everybody listen because they know that from the Company. So this is the goal we want to go after. And we will get there.

I think right now, Timothy, our Company's, really leveraging economies of scale, efficiency, global network we have. Because now we are able to manage some sales distantly without even flying all over the world. We have amazing team assembled in Lahore, which is much more efficient. And imagine these guys supporting customers in 25 plus countries from Lahore, Pakistan. The biggest contract we signed a year ago with a major blue-chip auto captive, major auto manufacturer, is depending on NetSol's ability to deliver that from Lahore, Pakistan. So as the revenue continue to grow in $90 million, $100 million range, the bottom line will also improve tremendously.

So, please bear with us. I understand the credibility issue; I can see in investor also.

The second part of the question, we intended to buy back shares. And if you look at just last 12 months, we have been active whenever we can, given the liquidity personally speaking. But the Company has to manage, there were some delayed receivables in the last quarter. I believe that [held] us back in buy back. The buy back plan is still on, and we will continue that. We did not buy too many shares, but our goal is to whenever we can, spare cash, without disrupting our operation, we will absolutely buy back.

There were shares bought back in the quarter just ended then?

Just a few. Nothing to brag about. But I think that plan will remain on.

We are pretty conscious that we've given the press release, we want to do it. But again, you have to first see without disrupting the operational cash flow. So we have [$9 million] cash in the bank. I would like to see $20 million in the bank, to be much more healthy. It will happen as we get more receivables, and new contracts and the bigger deals will come into play.

So, look, we're confident. We're committed. We are the largest (inaudible) holders, from day one we never sell shares. I have never sold shares, since 20 years. So we believe in the Company and we will keep investing with our time and with our commitment; of course, whenever we can, we will buy, personally and the Company.

Michael Vermut, Newland Capital.

I think it is great that you are finally, after all this time, really focusing on the bottom line. That will come. And that's my opinion. Once you start to tackle it, that will come.

I just wanted to go back, too, on the, maybe, Naeem, just the growth into 2018, 2019. Has anything changed? Or do you still feel confident when we go through that $100 million in three years, that we will see this, first of all, that the numbers you gave for this year are pretty much solid, to look at the numbers that you said for FY17. And then I'm not asking for guidance, but in a rough framework with what's in the backlog, what you expect to close, that we can expect a 15%-ish growth rate over the next few years? Is that in a rough frame what we should be thinking about, modeling this out?

I won't dwell on percentages, Mike, but I could just say that, as I said before, I will reiterate that the current views we're getting now, they are premium clients. I obviously cannot name them due to confidentiality, but we are dealing with the largest companies in the world now. And these people have very strategic, transformational programs that need our platform. And then they have to spend the money.

So really I see the deal sizes that are continuously grow. And so the large deal that we did a year ago is going to become more like a recurring trend, not an aberration. So we still need the smaller deals because they create good recurring maintenance revenue. And we generate strong services revenue from them as well.

So I think a combination of the two. But we are not really going for the very small deals anymore. Because of just essentially the opportunity cost of them, so we deploy people. We do not want to hire more people, as Najeeb said. We have the right scale now looking at being a more efficient team and trying to deliver more with the same number of people; that is the key to building a strong enterprise. And now these revenue targets that we have given you, we have consistently grown, as you have seen, 15% CAGR, maybe even 20% over the last four years.

However, we're not focusing on the bottom line. Because we know the revenue is going to grow. The top line is going to continue to grow. But how do we bring more profit in? And I think that is where some of these new programs are going to be very effective. That the sales part, I think, we are pretty well covered in. And now is to how do we improve in EPS.

Okay. Well, I think it is a great focus. And I will reiterate, I think it would be a huge benefit to see across-the-board Management, Board members which have not purchased shares and do not have a large ownership whatsoever, and hopefully they are listening to this, that there is increased ownership across Management and the Board. Especially when we are trading at a $45 million market cap, and from one customer we have a $120 million, 10-year deal. So, that would be a suggestion on my part, and as a large shareholder. So thanks, guys.

Thank you, Mike.

Thank you, we appreciate that.

Yes.

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

Well, thank you again for joining us today. As always, on behalf of our Board and Management teams throughout the globe, I want to thank our shareholders for the continued support. I will see you next time. Thank you, operator.

And thank you. The conference has now concluded. Thank you all for attending today's presentation. You may now disconnect your lines.