NetSol Technologies, Inc. (NTWK) Q2 2014 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the NetSol Technologies Reports 2014 Second Quarter Results Conference Call. [Operator Instructions] I would now like to turn the conference over to Patti McGlasson, Senior Vice President, Legal and Corporate Affairs, General Counsel and Corporate Secretary. Please go ahead.

Thank you. Good morning, everyone, and thank you for joining us today to discuss NetSol Technologies' fiscal 2014 second quarter results. On the call today are Najeeb Ghauri, Chairman and Chief Executive Officer; Roger Almond, Chief Financial Officer; and Naeem Ghauri, President, Global Sales and CEO of NetSol Europe and [indiscernible]. Following the review of the company's business highlights, financial results and discussion of the company's strategy, we will open the call up for questions. The call is scheduled for 1 hour. First, some housekeeping issues. Earlier today, NetSol issued a news release announcing the company's financial results for the first quarter of 2014. If you have not received this news release and if you would like to be added to NetSol's e-mail list to receive company information directly, or if you would like to change your contact information, please contact NetSol Investor Relations at investors@netsoltech.com. 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 90 days. Please note that all of the information discussed on today's call is covered under the safe harbor provisions of the Private Securities Litigation Reform Act. The company's discussion may include forward-looking information, reflecting management's current forecast of certain aspects of the company's future, and the 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 release 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 may be discussing certain non-GAAP measures and the release issued earlier today contains a reconciliation of these non-GAAP financial results to the most comparable GAAP measures. With that said, I will now turn the call over to Najeeb Ghauri.

Good morning, and thank you, Patti. Thank you, all, for joining us today. Let us begin with the results reported this morning. As we discussed in the last quarter, near-term, we expected demands for the first generation solution to be impacted as we enter this transition period to our next-generation financing and leasing solution, as known as NFS Ascent. You may also recall, we officially launched NFS Ascent during the second quarter, slowing down our push for the first generation solution from the 2014 first quarter. While the launch impacted this quarter's results, let me share with you why we are optimistic about our near and long-term prospects and what is behind a major hiring push. Across the globe, our team has been busy marketing NFS Ascent, resulting in a healthy and active pipeline across each of our key regions. A pipeline that consist of potential first-time new clients, as well as existing clients seeking upgrades or additional support as they expand into new countries. Specifically, in North America, we have developed as strong new business pipeline than we have ever had before, all based on NFS Ascent. In Europe, we also have developed a strong pipeline of potential new business, particularly with customers that we already support across other multiple regions outside of Europe. And in Asia-Pacific market, we continue to make progress, bringing our pipeline up to speed with our new solution. Looking at the opportunity ahead, in order to turn around implementations at a faster pace than we have in the past as long as we [ph] service more business concurrently, we are actively adding to our talented base of employees. This investment is particularly important as we look at making further in-roads into North America and in Europe markets where we are looking at a number of large and complex implementations that require highly-trained staff. This quarter, we added more than 125 employees to our core business, primarily to support our next-generation solution, with 100-plus employees currently going through training. In total, we have added more than 300 employees since the beginning of the fiscal 2014. And as we move forward, we have plans to add additional 100 to 150 employees so that they are trained and readily deployable for new business opportunities. And hiring is not just for our core business. Our joint venture with a U.K.-based innovation group, NetSol Innovation is also experiencing growth. As you might recall, NetSol Innovation provides support services, enabling the Innovation Group to scale solution delivery operations with its customers, including Avis, Budget Car Rental Group U.S.A, Hertz U.K. among others. What started off as a 5-employee outsourcing team in Lahore, Pakistan in 2005, has grown in more than -- to more than 140 people now, and the growth there continues as well. Today, we are making an investment in expanding our organization so that we can move quickly on new opportunities. At the same time, we also remain conscious of the investment made by our clients in our first-generation solution, with more than 1,000 people supporting our global customers, supporting a significant amount of service revenue and maintenance revenue for our first-generation solution. While short-term, the additional investment in business and people impacts our bottom line. We cannot wait until an agreement is complete to begin training new staff, nor can we sacrifice the quality of service that has earned the trust and respect of our customers. Moving forward, we believe our strategy to enhance our infrastructure and build capacity with talented technology professionals speaks to our confidence and vision in becoming the leading solution provider to the leasing and finance industry throughout the world. Now, I'd like to turn the call over to our NetSol CFO, Roger Almond, to review the company's results for the second quarter. Roger?

Thank you, Najeeb. As Najeeb mentioned, our top line was impacted by a decrease in license revenue as a result of the transition to our next-generation solution. Total revenue for the second quarter fiscal 2014 was $8.7 million versus $11.8 million in last year's quarter. Maintenance revenue continued its upward trend growing 8% to $2.9 million, from $2.7 million in same period last fiscal year. We anticipate maintenance revenue to remain consistent with a gradual upward trend as we maintain our current customer base and add additional licenses. Second quarter Services revenue was $5.4 million versus $5.6 million last year. Service revenue remained consistent with the previous year as a result of services performed for customers who have implemented the first-generation NFS product, as well as continued change requests from customers seeking additional custom work to meet their increased needs; needs primarily related to the growth of the auto sector and changing consumer dynamics in certain parts of the world. Cost of sales for the second quarter were $6 million compared with $5.1 million last year, and sequentially, $5.7 million in the preceding quarter. The increase is related to higher salaries, depreciation and amortization. Total operating expenses for the second quarter fiscal 2014 were $4.3 million, up from $3.8 million last year. However, operating expenses were down from $4.9 million in the first quarter of fiscal 2014. We ended the quarter with approximately 1,250 employees, of which 125 were added during the second quarter, many of which, are currently going through training and are not yet billable. Additional employees added approximately $200,000 in incremental expenses for the quarter. With the lower license revenues, we reported a net loss for the second quarter of $0.18 per share based on a weighted average number of shares outstanding of $9.1 million, versus net income of $0.28 per diluted share based on 8 million shares for the second quarter of fiscal 2013. Importantly, during this transition period, our cash and cash equivalents balance grew to $11.6 million from $6.8 million at the end of last quarter, as our collections continued to improve. Cash and cash equivalents at June 30, 2013 were $7.9 million. Accounts receivable was $16.7 million compared with $14.7 million last year, reflecting the completion of certain project milestones that are now billable to the clients. Correspondingly, revenues in excess of billings decreased from $14.7 million at June 30, 2013, to $6.3 million at December 31, 2013. During the quarter, we made purchases of property and equipment of $3.4 million related to the investment in our delivery centers and our IT infrastructure. We anticipate that our capital expenditures for the next 12 months to be between $2.5 million and $3.5 million as we position ourselves for long-term growth. With that, I would like to now turn the call back over to Najeeb. Najeeb?

Thank you, Roger. Clearly, the results this quarter reflect a lower revenue base during the transition period to our new product, combined with higher expenses, and extended our support and delivery capability. And importantly, we are well-capitalized as we move through this period with a talented staff in place and a number of new recruits going through training, as well as the infrastructure to support them, an investment that is crucial for the long-term growth and stability of the company. With this build-out, our aim is to capture market share with NFS Ascent and also implement more projects concurrently and at a faster pace across the globe. We believe that our next-generation solution fills a unique need in the marketplace with flexible design, robust functionality, advanced architecture and multiple deployment and procurement options. Bottom line, now it's about converting the pipeline we have built for our next-generation solution while continuing to do what is necessary to propel NetSol to the next stage of growth. Whether you're new to NetSol or have been with us for a while, thank you for your continued support. With that, we would now like to open the call for question-and-answer. Operator?

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

How many live Ascent customers do you have? And have all the kinks been worked out of it?

Howard, please repeat your question. It's kind of echoing, sorry.

How many live Ascent customers do you currently have? And have you basically given it the thorough pacing it needs to begin converting to other [indiscernible] pipeline?

Yes, Naeem, please go ahead.

Yes. We currently have 1 full live implementation at Nissan Leasing Thailand. In addition, our Ascent platform actually is one that has evolved over the last 1.5 year and so. So what we have been doing is, on our older platform, our own [ph] platform, we have been implementing smaller modules of Ascent as an upgrade path to our existing clients. So in terms of having Ascent out there, we have quite a few installations and modules already -- that belong to Ascent. But as far as the full implementation is concerned, there is 1 which is already live and there are 2 which are in the process of being implemented.

This is a question in terms of what you're seeing in the pipeline. What -- how could you describe, I guess, the contracts that -- the value of the contracts that you're seeing, especially in North America, potentially coming down the road?

North [indiscernible] market is starting to really track well. As you might be aware already, we are implementing a very large project in Mexico. But that is for our older generation. Therefore, the [indiscernible] implementation depending on how the scope grows. In addition to that, we are negotiating with at least 1 very large client for an Ascent implementation and that is really imminent in the next month or so, and that we should start implementing somewhere around March, April of this year. The values of these projects are in excess of $4 million to $5 million. Our benchmark, really, for Ascent is to aim for a $5 million project as a minimum, but sometimes, some of these projects, some are a little bit lower and some are a bit higher.

And our next question is from the line of Matthew Paul with Sidoti & Company. Matthew Paul - Sidoti & Company, LLC: Just 1 question for Najeeb this morning. It seems like you've expanded your expectation on how many employees you're going to bring on to NetSol, from originally issued at 300, now, you're looking at somewhere from 400 to 450. I just wanted to ask if that's an overall sign of confidence in your long-term pipeline? Or if we could kind of extrapolate this as your expectations for the near-term deal which was quicker than expected?

Thank you, Matt, I think you're right. We have expanded our region. We see that the project that Naeem just mentioned, for example in the U.S., Asia-Pacific and, of course, in Europe. We see the value of this volume will be potentially higher than in the past for the old generation system. And also, it needs a lot more people to support current implementation also, as we see in the pipeline. So I believe, this is the -- really, a well-thought-out investment plan for the company and the budgets we have in place to really have enough people in Lahore, in Bangkok, and also, now in the U.S., to support the existing clients, but also the new pipelines that we've been building for the NFS Ascent. So I think that this investment should really bode well in the much stronger revenue and, of course, the bottom line. Matthew Paul - Sidoti & Company, LLC: Just 1 quick follow-up. If you could possibly break down of all the new team members, the percentage in Lahore versus, I guess, California?

Well, we have a very small team in California, including our office in Calabasas where we have mostly our core team for NFS and Ascent now, and in San Francisco, Alameda office has about 18 to 20 employees supporting our current leaseback customers and the maintenance contract. So all in all, we are looking at about 32 in the U.S. and about 1,000-plus in both Lahore and Karachi offices to support our core business, innovation growth, services and, of course, our NFS Ascent group. So like Roger mentioned, the total is about 1,250 as of last week. And there will be slightly be more hiring within the next 12 months to make sure that we have enough people trained and ready to support our new developments in NFS Ascent.

[Operator Instructions] I'm showing no further questions. I'll turn the call back to NetSol management for closing comments.

Well, thank you, again, for your support. I look forward to reporting to you on our next earnings and the progress in between. Thank you, all, and have a good day.

Ladies and gentlemen, this concludes our conference. Thank you for your participation. You may now disconnect.