NetSol Technologies, Inc. (NTWK) Q3 2012 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the NetSol Technologies Reports 2012 Third Quarter Conference Call. [Operator Instructions] This conference is being recorded today, Monday, May 7, 2012. I would now like to turn the call over to Patti McGlasson. Please go ahead.

Good morning. Thank you for joining us today to discuss NetSol Technologies' fiscal 2012 third quarter results. Calling in from our Calabasas, California office are Najeeb Ghauri, Chairman and Chief Executive Officer; and Shaz Khan, Senior Vice President, COO and Co-Founder of Vroozi. From our Pakistan Office, we have Boo-Ali Siddiqui, Chief Financial Officer; and calling in from our London Office is Naeem Ghauri, President of Global Sales and CEO of NTE and Vroozi. Following the review of the company's business highlights and financial results, we will open up call for questions. I'd like to remind everyone that today's call is being webcast at www.netsoltech.com. A playback will be available for one week and may be accessed on the Internet at NetSol's website. Additionally, all of the information discussed on today's call is covered under the Safe Harbor provisions of the Litigation Reform Act. The company's discussion may include forward-looking information, reflecting management's current forecast of certain aspect of the company's future, and our actual results could differ materially from those stated or implied. With that said, let me now turn the call over to Najeeb Ghauri. Najeeb?

Thank you, Patti, and thank you, everyone for joining us today. I'm very, very pleased to report that the momentum in the business has shifted in a very positive direction, recovering from a challenging period just a few quarters ago. Our top line is now approaching its similar level from last year and sequentially, our upward trajectory continues. Revenue came in higher than our projection, and we now think that growth for the second half of the year will be strong in the range of 30% to 40% over the first half, which is an impressive increase from our original guidance of 10% to 15%. Across the globe, our entire team at NetSol is focused on improving the company's performance, and the recent flurry [ph] of new business wins of top-tier global companies speaks to their determination. Their demand for the current NFS solutions remained very strong in the close of the third quarter, the pipeline for our current NFS solutions was up approximately 30% to 40% from last year. Specifically, we are losing a surge in demand for the full suite of NFS solution with the bigger deals in pipeline that are exceeding $4 million in value, just up from historical average of $2 million deal value. We view this as the indicator that many of our global Fortune 500 clients in the auto and banking sectors are experiencing growth in their respective markets. To further capture market share, we are moving full speed ahead with the rollout of our next-generation NFS solution after one successful implementation in Bangkok. While we prepare for the launch later this year, our activities are focused on business development efforts in the U.S. market LeasePak-SaaS under cloud-based solutions and for our Vroozi division with smartOCI product. Now with capital on hand to invest…

Thank you, Najeeb. Across the globe, our business continues to build momentum with the top line coming in at nearly the same level as last year. And as we move forward, we're increasingly confident that this trend will continue. As Najeeb mentioned, the flurry of new business wins, combined with some of our growth initiatives across the globe, including wins in the Vroozi division, all bode well for each of our revenue line items. Total revenue for the third quarter of fiscal 2012 are $10.6 million compared with $10.8 million in the third quarter last year. On a sequential basis, revenue increased 23% from $8.6 million in the second quarter of fiscal 2012. License revenue was $3 million compared with $2.7 million in the last year's third quarter and $2 million on a sequential quarterly basis. We are increasingly excited about the continued strength in license revenue. Maintenance revenue remains steady at $1.8 million when compared with the same period last year. Services were up 10% to $5.8 million compared with $5.3 million a year ago. On a sequential basis, services income increased 31% or $4.4 million to $5.8 million. Moving forward, as we continue to gain new customers for our current solutions and roll out our next-generation platform, our base of recurring revenue should continue to show further improvement. Total operating expenses for the third quarter of fiscal 2012 was $3.5 million versus $2 million in the third quarter of fiscal 2011 and compared with expenses of $3.5 million in the previous sequential quarter. The year-over-year difference primarily reflects increased SG&A, primarily reflecting our increased starting level in Thailand, China and in the U.S. Vroozi division. We also recorded a lease abandonment charge that worsened in the last year, which resulted in lower operating expenses. Moving on to net…

Thank you, Boo-Ali. Our third quarter performance is a nice improvement when compared with the previous 2 quarters, and our momentum continues to build. Our efforts across the globe and assistance from our joint venture partners we are putting in place the pieces required for us to achieve a goal of doubling our business over the next 2 to 3 years. This is ambitious, but we feel strongly that it is achievable. One of those key growth initiatives is in our Vroozi division. Let me now turn the call over to Shaz Khan to provide an update on the marketing of smartOCI and introduce one of our new products. Shaz, please?

Thank you, Najeeb. Our smartOCI solution continues to gain traction in the marketplace with the recent contract win with a major U.S. media company, bringing total current customers to 9. Our new business pipeline remains strong, and we are on regular discussions with several Fortune 500 companies in the respective purchasing organization to implement our solution. As Najeeb mentioned earlier, a portion of the recent capital raise will be directed towards the Vroozi division, and we intend to use those funds to higher sales, marketing and implementation specialists, required infrastructure we need to close and service new business. As we stand now, we are currently targeting first year annual revenue in the range of $4 million to $5 million for the division in calendar 2012. However, as we add resources and roll out additional products, we could greatly accelerate our revenue generation. One such new product for the smartOCI marketplace is the smartOCI Catalog Manager, an offering to help companies with the process of exchanging and loading catalog content between purchasing organizations and our global supplier base, reducing the time-to-market for catalog content. This technology will be unveiled to potential customers at the upcoming SAP SAPPHIRE NOW conference on May 14, in which Vroozi will have a booth presence. Looking forward, the opportunity for smartOCI looks very promising. And with additional tools added to the marketplace, we hope to make it even more appealing to potential customers or increasing overall profitability of division. We look forward to keeping you informed of our progress, and I would now like to turn the call back over to Najeeb. Najeeb?

Thank you, Shaz. As we look across the globe, we are focused on growth and conducting those activities which we believe will bring this company to the next level. As U.S. has been the biggest market in our space. We are actively marketing LeasePak on SaaS model. Now turning our attention to the rollout of next-generation NFS, which we believe will open up our solution to host a of new companies in the U.S. At the same time, we're continuing to market our current NFS solutions, specifically, accompanying in the Asia Pacific region, where the current NFS solution is preferred and is surging in demand. Looking at our current wins and the number of companies we are talking with now, we believe our growth should accelerate. As such, we remain steadfast in our belief that the company remains undervalued. And as such, I and the rest of the management team continues to purchase shares, and we anticipate this inside buying pattern to continue. At NetSol, we have hundreds of committed employees earning shares and this strength is growing through. We're extremely committed and excited to execute on our plans, drive revenue growth and enhancing profitability for the long term, and I'm confident our valuation will mirror our success. At this stage, I'd like to provide an update on our NASDAQ listing status. Although the grace period to maintain dollar price, $1 price, will end by late August 2012, we are confident we will be able to regain compliance based on our execution of much improved results, aggressive marketing campaign through non-deal roadshows, investors conferences, enhanced company exposure to institutional investors and expanded research coverage. In addition, we are very optimistic in our outlook for fiscal 2013. And we anticipate moving -- providing guidance for the year end of 2012 reporting [indiscernible]. Based on those on the stellar efforts of my team to date, I have every confidence 2013 will be a watershed year for NetSol that will elevate our company to a next level of growth and brand recognition. Therefore, at this stage, the company has no plans to file for reverse split. With this, I'd like the operator to open to any question. Operator, please.

[Operator Instructions] And our first question comes from the line of Howard Halpern with Taglich Brothers.

On Vroozi revenue, where is that mostly going to be seen, on the services line of your income statement?

Yes, Naeem, you want to jump in?

Yes. The Vroozi revenue, you will see in 2 specific areas. You will see it in license and you will see it in services.

Okay. I just wanted to make sure on that. And how many of the 9 customers have implemented as of today?

We are at 4 customers right now.

4 customers and those -- the rest should be done in the balance of this upcoming quarter -- current quarter?

The remaining clients will arrive within the next 3 to 4 months.

Your next question comes from the line of Mike Vermut with Newland Capital.

Two quick questions for you. One, that $666,000 of charges, that's a one-time charge, I assume, in the quarter, on the sale.

Right.

That's -- we shouldn't see any more of that, so we can kind of normalize and get to a $0.04 number.

Yes. Please elaborate your question. I don't think we're getting your question.

I saw there was an item in your income statement, $666,000 loss on disposal.

Okay, okay. Boo-Ali, do you want to come to discussion?

Yes. I'm Boo-Ali. It's just $660,000, I think. It's a one-time loss.

Okay, got it. So we can adjust that. And then let me ask this. When you're giving your outlook of possibly doubling the company, the revenue line over the next 2 years, where can margins go with that? For China back and to an operating income number, where do you think margins should go once you get that acceleration of the top line?

Well, first of all, let me just clarify everything. We can double our revenue between 2 to 3 years, which is pretty impressive. And I think that you have -- absolutely, when you see such a rise in license sales and business coming from the Asia Pacific and then of course, when the NFS is rolled out in all the key markets, I think this will tend to improve our gross margins. I believe, based on our track record, historically, we've been over 65% to 70% gross margin range. But of course, the company is aggressively building the development center in Thailand and expanding in China, and now we're entering in Brazilian market. We're all very optimistic growth markets for us, and we believe the margins can continue to improve in an impressive pace. In the beginning, yes, Naeem and our team in Asia are looking for expanding their sales organization, expanding their -- much more delivery capability because they have backlog, an exciting backlog that they can now execute based on how fast we can improve our infrastructure. So I think Naeem may have more comments on this thing, but it's really -- I really believe the margin will improve as the sales improves.

Yes, just to add to that, Najeeb, the margins obviously improve with more license sales. And what we are aiming for was a new product coming online. We have a lot of opportunity to go back to existing clients, as well as new prospects to get an additional round of new license fees. So that's the exciting part. But we believe the license fees will be quite a big piece of this growth. So we continue to have good margins and we are aiming -- our aim is to be about 60% gross margin.

That's great. Okay. So I mean, sort of backing in, you double revenues. You get the $0.40, $0.50 plus of earnings, correct? Just doing the math.

We would love to see those numbers, absolutely.

[Operator Instructions] And your next question is follow-up from the line of Howard Halpern, Taglich Brothers.

Could you talk a little bit about the opportunities you should be seeing in Brazil and currently seeing in the Middle East?

Yes. Well, I will pick on Middle East and Naeem will jump in because he's overseeing directly the launch of their operation. We've been in Saudi Arabia for just about over 2.5 years when we signed the JV. And the reason you're seeing some traction we're getting some new contracts, the market is quite well capitalized and the whole market in -- the GCC nations, not just Saudi Arabia alone. It's really growing in their infrastructure, in education, in defense, public sectors, in IT and many, many of the new areas. So I see NetSol as a -- as the IT partner for a very established group, Atheeb Group, which is a well diversified group for many, many years in the Kingdom, very well known due to royal family's ownership there. So I think we have a tremendous opportunity, and it is happening slowly but for surely. Now we are bidding into some bigger contracts, which involves some serious U.S. companies as well as partners, where I really believe that in the next few years, the JV will really do well and really gives us amazing penetration and name as a premier IT company partner with a very established local company in Saudi Arabia. So I'm really very optimistic about the options in there. So Naeem, why don't you just help them about Brazil and what we're doing there?

Yes. Traditionally, when you go to new market, the longest time it takes is to actually get established and become preferred vendor with some of these larger companies because the biggest barrier to get in is always the preferred vendor status. We did the hard work in Saudi Arabia. It took us a couple of years, but we've now proven that, for example, we have proven for Aramco. Saudi Aramco is the largest oil company in that region. And similarly, we're getting into other government organizations. In Brazil, we expect it to be a very dynamic market. You can compare it to China, somewhat. But I believe we can move faster in Brazil than we did in China. Because in China, we execute totally organically and did not have a partner. We went there on our own, and it took as a couple of years before we won our first business. In Brazil, we are with a very established player with very deep roots into the Brazilian economy and business. So we believe our partner will help open a lot of doors, and they're extremely eager for us to launch the business, which we had a soft launch but actually finding the right people to resource the company, the JV, has been the most challenging aspect. And also, we're in the middle of this raise. So we believe now we're well capitalized. We don't want to sort of expand before we have the capital. So now we are well on our way in terms of achieving a hard launch of the business. You'll start to see some news maybe in the next 6 to 9 months coming from Brazil, hopefully.

Okay. And one last question. Could you just provide some -- I don't know, historical background and to where you are today in terms of how the pipeline has built since the end of last fiscal year, the first 2 quarters this year into the third quarter as you enter the fourth quarter?

I think we did -- yes, Naeem, go ahead.

Yes. The way it works is that you might have seen quite a few contract wins recently. So that happens when you actually built a healthy pipeline. So going forward, we feel that historically, at a very strong level in terms of how much potential business is in the pipeline. So we believe a lot of the business gets converted. But we believe 30%, 40% will get converted into real deals in the next 3 to 6 months, and the pipeline will get stronger. We will see a lot of interest in Asia Pacific for our NFS product. We're seeing a lot of interest in the U.S. and Europe for Vroozi smartOCI. So historically, we had a very good position. That's why you see these numbers coming in this quarter and start to see those coming in the coming quarters also.

Our next question comes from the line of Tom Connolly with Thundercloud Consulting.

My question is around the geopolitical issues that came out a year ago. I guess now -- and how you've overcome that?

I think -- a good timing for the question. Obviously, as I said in the call 2 weeks ago, that we were able to quickly respond to build up the Thai -- NetSol Thai office in Bangkok, and now we have a full-blown delivery capability with expanding resources and local Thai employed in other parts of the company. And I think that has really helped. When I mentioned about the successful implementation of Indian contract first time last summer, that was really, for me, proof in the pudding where we were able to immediately deploy our team and implement the system with a major client in India. So I think what you're seeing is Bangkok is becoming a secondary delivery center. Of course, our center of excellence remains in Lahore. It's actually getting stronger and stronger in terms of capabilities and development capability. But Bangkok is also another you can call it a equally desirable location, where a lot of customers, they will give a better color because they are coming to our facility and looking into our system and our people and demos. So that is really comforting this company was able to quickly move and upgrade our global delivery, not just in Bangkok but also China and the U.K. and U.S. We're also beefing up our people so we can support local customers without having to depend on any one location.

I think it's actually -- Naeem just jumping in. Again, see the big difference in the company now as opposed to a year ago was we were totally dependent on one location for delivery. And actually, when we had the big event in early May last year, it had an immediate impact on client sentiment as our business virtually stopped for that quarter. But since then, we've gone through a huge effort to diversify out of our development center and to Bangkok. So Bangkok is now a real credible alternative to Lahore, and in that one year, we've had a lot of client visits into Bangkok. New clients and then existing clients also have gone in and done their due diligence in looking at how viable that center is. And I'm happy to report that really that dependency of having one center and having any geopolitical event in that region would have no significant impact anymore. I think at one time, it would have purely a material impact but now I believe we are past that stage that it does not affect the company to the core. It may have may be a blip. But now, we have gone way past that point.

And at this time, I'm not showing any further questions. I would now like to turn the call over back to Najeeb. Please go ahead.

Thank you, operator, and thank you, everyone, for listening to us today. And we look forward to see you again in the year-end call some time fall this year. So thank you and have a good day.

Thank you, ladies and gentlemen. If you like to listen to a replay of today's call, you may do so by dialing (303) 590-3030 or 1 (800) 406-7325 using the access code 4534723. Thank you for your participation. You may now disconnect.