NetSol Technologies, Inc. (NTWK) Q2 2017 Earnings Report, Transcript and Summary

Good day and welcome to the NetSol Technologies’ Fiscal 2017, Second Quarter Conference Call. All participants will be in listen-only mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Patti McGlasson, General Counsel. Please go ahead.

Good morning, everyone and thank you for joining us today to discuss NetSol Technologies’ fiscal 2017 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 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 forecast of certain aspects of the company’s future and our actual results could differ materially from those stated or implied. These forward-looking statements are qualified by the cautionary statements contained in NetSol’s press releases and SEC filings, including its annual report on Form 10-K and quarterly reports on Form 10-Q. I would also like to point out that NetSol will be discussing certain non-GAAP measures. The press release issued earlier today contains a reconciliation of these non-GAAP financial results to their most comparable GAAP measures. In addition, I’d like to remind everyone that today’s call is being webcast at www.netsoltech.com. Following the conclusion of the call, the webcast may be accessed on the NetSol Web site, where it will be archived for one-year. With that, I’ll now turn the call over to Najeeb. Najeeb?

Thank you, Patti. 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'll see in the press release, the net revenue for the second quarter were $17.6 million, representing an increase of 9% from prior year period. Our fiscal Q2 revenue performance was driven by strong growth and our license and recurring maintenance fees reflecting new implementations as well as continued cross sales of additional solutions 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. Now, 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 NFS Ascent Solution. Presently, we believe every single one of our major multinational clients is a potential target for an upgrade NFS Ascent from legacy 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 currently expect the conversion rates 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 customer and the number of active conversations we are having today with our clients regarding upgrading to Ascent is very encouraging. We believe conversions of our existing customer 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 captism 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 software companies in the world in the U.S. In addition to the potential growth from selling NFS Ascent to existing and new clients, we will continue to benefit from our three major Ascent contracts we have already signed in last two years and they were already announced which have a total aggregate 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 specially given that the solution carries contract values significantly above those of our legacy systems. As of any new product release, a meaningful penetration can take time, nevertheless we are seeing continued interest from multinational auto captive, 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 these solution. From a regional 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 add 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 SMTP [ph] market in the world. We believe, we are very well positioned in the U.S. market and anticipate at least one new win in fiscal 2017 and we are building a stronger pipeline for 2018 fiscal year. Now the China market is continuing its overall strong growth, growth trend in the auto sector, as a number one market with sales of over 23 million units in 2015 it far exceeds the U.S. market. NetSol continues to be a defect leader in January with almost 30 clients, including both multinational and local Chinese companies. In China, we expect the future growth to come predominantly from the client conversions to NFS Ascent as well as from new customer acquisitions of our legacy NFS system. To meet the fast pace business dynamics of the Chinese leasing market, we 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 12 clients from Shanghai, we have a growing new pipeline in that region. Looking at our other Asia Pacific markets, we established a lower cost share office in Jakarta, Indonesia a year-ago, as a result we have developed a new pipeline for Indonesian fast growing leasing market or leasing economy. In Australia, we have further consolidated our team with senior sales and client duration managers, this is a very promising market with a robust pipeline and five existing 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 Lahore, 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 the 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 majors aimed and increasing our productivity and reducing our cost across or entire organization 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 being to reflect from fiscal Q3 and onwards -- fiscal quarter three and onwards. We will continue to evaluate further opportunity for cost reductions through fluoridation 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 strategies for both NetSol and our shareholders. NetSol is committed becoming leaner, more nimble and to significantly improve our revenue and then net income per employee metrics. Before turning the call over to Roger, I would like to discuss our current stock market valuation. We believe our current market value does not reflect the strong fundamentals and growth potential of our business and is well below the entrancing of the Company. The founding management team, and our collogues are fully aligned behind one vision of strong profitable growth and a commitment everyday to build significant shareholder value. It is our belief that as we execute against vision and continue to share the NetSol success story in the market that our stock market value would benefit. As a CEO and Chairman, I'm fortunate and excited to be serving to great company, this is all what we do with focus, believe and passion every day. And then I'll turn the call over to Roger Almond, to review our financial performance. Roger.

Thank you, Najeeb. I’ll begin with the review of our fiscal second quarter financial results, then I'll turn the call back 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 new 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 fee in the 12 country Ascent contract with our largest customer and sales of our original offerings in the U.S. As Najeeb mentioned we're 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 2.3 million in the prior year period, primarily driven by new customer agreements that went live with our products during late fiscal 2016 and into fiscal year 2017. 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 service revenue primarily reflects a natural completion of certain customer implementations, a decline in change request as well as lower revenue generated from our NetSol innovation joint venture with One Ensure [ph]. 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 consultant 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 cost and depreciation and amortization. GAAP net loss attributable to NetSol for the fiscal second quarter 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 non-controlling interest driven by the mix of profits between NetSol's wholly owned subsidiaries and joint ventures and approximately $500,000 in increase in loss of foreign currency exchange transactions primarily due to the decrease in the value of 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 top line growth offset by higher cost of revenues and higher operating expenses driven by ongoing strategic growth investments. At December 31, 2016, cash and cash equivalence were 9.5 million compared with 11.2 million in September 30, 2016, and $14 million at December 31, 2015. Turning to our cost savings initiatives. As Najeeb mentioned, we’ve taken a number of actions over the past three months, which are aimed at reducing our operating cost and increasing our overall productivity. We currently expect these initiatives to result in approximately $1.5 million of cost savings in the second half of fiscal 2017 and approximately $4 million on an annualized basis beginning in fiscal year 2018. We expect to incur a restructuring charge of approximately $100,000 in our fiscal third quarter as a result of these transactions -- these actions. Now, moving on to our guidance. For fiscal year 2017, we continue to expect total net revenues at $73 million to $75 million. We’re adjusting our fiscal 2017 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’ll now turn the call back over to Najeeb for some closing remarks.

Thank you, Roger. So, as I reflect on the first half fiscal 2017, I like to highlights a few points here. I like to share some very positive development in Pakistan, home to our global delivery center. According to a Bloomberg report by Tyler Cohen on February 6, 2017, the Pakistan economy has surprised the world. Its 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 the rise of 46% life along with many other positive indicators of foreign direct investments and State Bank Reserves in dollars has also grown. Also, due to a Chinese investment is now over $55 billion in infrastructure and power plants, Pakistani economy should continue to offer new opportunities. Finally, the geopolitical environment over the last few years has made Pakistan a much safer place to do 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 two week, thereby boosting the value of NTI, which owns 68% ownership on NetSol Pakistan shares. In conclusion, first, demand for our products and services remain solid and the level of demand and activity we are seeing that NFS Ascent is highly encouraging. We believe, we are well positioned to generate improved revenue, growth performance in the second half of fiscal 2017 versus the first half. Secondly, our productivity and cost reduction initiatives will drive meaningful margin expansion and additional EPS accretion beginning in the second half of 2017 and accelerating in fiscal 2018. We will continue to make targeted investments across our businesses that are focused on capitalizing on significant market opportunity for our solutions. At the same time, we are carefully reviewing our cost 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 dealer in the large and growing market. We will continue to leverage our lending market position -- a leading market position, broad solution set and strong relationships with 200 plus blue-chip customers to drive towards our mid-term goal of achieving $100 million in revenue with strong profitability. With that I like to open the call up for questions operator.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question will come from Howard Halpern of Taglich Brothers. Please go ahead with your question.

In terms of I guess the productivity alignment and how we should have look at both in the second half and going forward since 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 we have illustrated that we have taken an 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 anymore technology people, at least until we hit some major revenues breakthrough, which we will eventually in the shorter-period. So I don’t believe there is going to be a drop in the margins, if anything it will improve onwards. I think we believe we did about 48% in Q2, so I'm anticipating to exceed 50% - in 50s in the coming quarters. Secondly, I think we also look at the sales activity or the cost of sales, which is mostly travel and meeting with the clients. That activity is actually on rise, as a result we have seen a very intensive pipeline in the U.S. and Asia-Pacific and in the UK market. So that will grow steadily, but we will be very efficient in 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's you are going to see is I think a lot of the change or [technical difficulty] going to be in our cost saving is going to be coming out of our Pakistan office, and a lot of that's going to be with the -- those who we have hired in our One or legacy product that we don’t need as many people and so those will be let go and you'll see a decrease in our personal from that stand point. Also in the 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, getting to your pipeline and you know it's an exciting pipeline that you describe especially with, I think you had would mention early that you anticipate hopefully in fiscal '17, one new win in North America. But could sort of describe based on the pipeline even in terms of dollar amount or number of clients, how far a long in the pipeline or if you could segment the amount somehow, to say, how many are closed, how many are just starting. If you can give a profile on that?

I'll have Naeem give a good color on APAC and maybe Europe, then followed by Jeff, will give you some prospective in the youth market. Go ahead Naeem.

Howard, so the way we do our metrics on where we are with different opportunities is so see how many different opportunities we are at the book to vendor stage. This is how we're able to separate the pipeline from something which is eminent to others which are more medium to long term. So in terms of some of the eminent opportunities and where we are shortlisted or preferred vendor, I would say we are strong in Asia, at least two of them, which are multiple market, multiple country opportunity. So we are preferred vendors at at least two of them. These are opportunities that grow all across Asia. And the U.S., Jeff will give you more details, he's got -- at least there is one that we've had confirmed, as a shortlisted too. And there would may be one or two other that Jeff would like to share with you. Jeff?

Howard, good morning, with reference to the one sale for NTA that Najeeb mentioned, and Naeem also kind of alluded to. We actually -- we got a -- as we've said in the past calls, a very healthy pipeline here in NTA. We've been doing a good job of making sure we put a great team forward on this sales calls and guess we've had a lot of sales pursuits. We've got some that are penetrating very deep into that pipeline and we're down to what we know as the last two vendors in a couple of extremely significantly once. One being a Top 5 global software and tech company looking for a new solution. Another one being a household name, equipment finance company -- equipment manufacturing and finance company. So we're 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 are some of the ones that are definitely going to come through in this fiscal year yet.

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

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 fiscal '18, '19 and beyond?

Yes. I think no, nothing has changed. If anything it's more positive, believe me if you look at the pipeline activity, especially in North America, a year ago we didn’t have the team that we have now under the leadership of Jeff Bilbrey in the U.S. and that has really brought some tremendous new prospects and major a blue-chip potential customer. So, I think that is very encouraging and as you know for years we’ve been planning to really position the use market and then especially with the new product Ascent, but it needed the right team, so Jeff has six, seven key people who are supporting on the frontline. Same things goes for Asia, I mean the numbers are very encouraging, in China and Indonesia and Australia I just mentioned. So, I believe we’re pretty confident for a continued strong growth in coming years. I think Naeem can add some more, I'm sure he's got a little more color on the growth prospect.

Yeah. So, Mike actually this is really quiet 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 is out there and any tender or any meaning or size, we are always invited to participate. This was not the case let say five years ago. So, as a result we’re able to focus on the really big opportunities, where we’re able to use our scale across the globe, I think we’re probably one of those few companies or maybe the only company in our spear that has a footprint across the U.S., Europe and Asia Pacific. So, lot of the client's 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 prospect 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 hopefully to close the right deals to be able to bring the revenue in within the fiscal. Going forward, '17, '18, I think we’re going to probably wait for the time to sort of give you some more visibility on where we’re going to be heading. But certainly, I don’t see any slowdown or anything to suggest of the growth is slowing.

Right. Can you give us a little look into, and you gave us the size of the pipeline, but when we’re looking into the Americas, and to Europe, what’s the size of the deal we are 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?

No, go ahead.

So, we separate the deals is that, in terms of our legacy solutions which is our current -- the order platforms in the U.S. leaseback and then the UK lease off 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 say, $4 million to $6 million would be our mid-tier. So, anything -- anybody who wants Ascent would have to spend at least that much.

Right.

Let me have the first year, majority of our pipeline that you see is the first year and they are typically clients who have spent upwards of 20 million, and I would say this is 20 million over three years, cost of ownership. If you shortlist that and go further than that, you can go 5 to 10 years deal with a client that size is worth 60 million to 80 million. So that's the kind of numbers we are tracking at the moment. The pipeline tells you more about the deal splits, it doesn’t tell you the 10-year cost of ownership, it tells you, that at the moment the opportunities we are tracking, over three years if they all close we get 150, but then you know everything doesn’t -- we don’t get that kind of penetration. But if we close at 20% to 30% [ph] of this that over three years you get that number. From the --.

All right, so we can assume a couple of the U.S. deals are those 10 million, 20 million, 30 million type deals that you are working on?

Jeff, maybe you might be able to share more info on this, I think we need to be careful. But I'll let you.

Yes, I'll take Naeem's lead on the careful aspects of that. But these are not going to be small deals. Mike, we have -- they are some pretty good size deals with some major companies, that global companies starting for print year in the U.S. 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's kind of what we're talking about.

Great, couple of -- two more questions guys and then I hop off. Yes, I know its attractive talent in North America and Europe there was a lot of stock grants right 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 U.S. for the U.S. base teams and the European base 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, so 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've been trying to lure very good talent all over the world, and whether they are in U.S. or UK or Asia when we bring senior managers like Jeff and Dough, we bring them with incentives that they have shareholding are options or of course sale through will get commission on a company policy that we have, that Naeem has under his belt. So it's important to incentivize people who leave their jobs to come that NetSol because then they have an opportunity to really do well financially if they perform and deliver the strong APIs. So, share grant is really in line with what we believe with our goals are long-term, and yes last two year we've been trying to bring lot of talent, this is one reason why we probably have one of the lowest turnover in the company. I think we have done very well in terms of holding good talent worldwide. Second thing, I think I don’t anticipate same percentage of shares contribution going forward, but because we don’t think we are going to hire anymore senior management in the company, we have enough team worldwide to really deliver our ambition. So it should be a much more I think a bit more less than the past two years, coming years.

Okay and then last question on and I'll leave you. We're trading now at, I don’t know $45 million, $50 million market cap, we have probably $150 million just in a couple of deals signed, but $1 of cash, we're below tangible book. Is it a worry for yours, is it a thought that, and there is so much interest now on Pakistan and Asian software companies that a suitor comes along whether it's strategic, a private equity buyer, it's so attractive right now with the talent you have, with the backlog you have, profitable cash flow generating company that that occurs?

No one can predict anything and especially given you are right, we've very well undervalued stock, I know that and we're doing everything we can. But we need to do a better job as a company to reach out to funds and investors. We used to have lot of funds a few years ago, but when the transition from legacy to Assent, we lost some good funds. So I'm pretty sure we can attract them back. And look we're focused on business, 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, off course it's a different market all together, simply because there is new investors coming in Pakistan, looking for the steel and there is only 300 companies listed there, and we have thousand listed in the U.S. market. So we have a little bit of a -- it's very crowded, in U.S. it's difficult to get, but we will eventually get fund managers and analyst to really looking 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 will 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.

I understand, but it's their totally personal decision, 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 will need them to what they are doing.

[Operator Instructions] Our next question will come from Michael Selden of Brill Securities, please go ahead.

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?

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

You probably saw the new license sale in terms of the largest revenue. We’re 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 are looking to close at least two deals in that time frame, so in the let's say 40 -- or is it three months and above, four and half months. So if we close two deal, you would see typically at least that much license and more. So you probably say that ongoing licenses that we picked up, its recurring and then on top of that we can pick up an equal amount. So, you can do your math from there.

Okay. That’s very helpful. Thank you, gentlemen.

Our next question is a follow-up from Howard Halpern with Taglich Brothers. Please go ahead.

One last one. Do you have any, as part of what you are doing forward, especially on the income statement line, are there any plans or programs in place to mitigate maybe foreign currency fluctuations? And some way to balance the noncontrolling interest fluctuations that have occurred?

Yeah. I think Roger has done some work, but you want to comment -- answer, Roger?

Yeah. Howard, we've looked at couple of different areas, but the problem is that the foreign currency transactions are occurring basically our package stand entity that’s 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 with, the rupee like a good -- something that you'd want to hedge, it’s not like the U.S. dollar. Everything here in the U.S. and if we were doing everything from the U.S. it would be a very easy hedge. But trying to hedge the currency as the rupee and it would just -- it would cause more problems than probably what we would gather. If we look over the gain, if we look over the history of it, we’ve actually benefited from not hedging. If we go from last six years, seven years, we’ve actually done very well by not hedging. It's just these last couple of years in which the euro has dropped and also the pound has dropped. So, I guess it is an issue that we have looked at, we’re hoping that now the pound and the euro are kind of at -- that they’ve leveled out and so that we won't see those huge transaction losses on our financial statements, but again to reiterating it, we haven't found a product that would actually work in assisting us with that hedging of the rupee against those foreign currency transactions.

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

Yes. Net it comes in kind of where you’re driving your revenues from and for example, if you’re able to get it from China or Bangkok or Australia or even the U.S., then you’re able to pull -- those are 100% own entities. So therefore we have less non-controlling interest going out. On the flip side of that 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 is continued -- there are taxes on internal services provider within Pakistan, but not on these outgoing shares. 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 it to another entity, we than do have to pay the taxes in that jurisdiction. So, you’re balancing the two, in which the makes the most sense for the Company, looking at it as a global entity there.

Okay, alright. Thanks.

Our next question will come from Timothy Stados, a Private Investor. Please go ahead.

I own about 150,000 shares, including affiliates. I would be one of the -- the third largest shareholder. 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 and 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 second back-half of the year. So that's a net swing of $5.5 million. And, Najeeb, I wonder if you or Roger, preferably you Najeeb, can explain how even $1.5 million in cost savings come in, we got a $5.5 million swing lower in our adjusted EBITDA estimates. Shouldn't that estimate have been lowered last quarter? That's a huge swing and it makes investors fearful. Can you speak to that? I think as a credibility issue that people on the street need to have reassurances. And I will also say, I was disappointed I don’t 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 could say you believe your stock is undervalued, but if you don’t step in the marketplace and you got $10 million plus in cash laying around, a strong balance sheet, it also creates credibility issues. Can you please speak to those two issues for me?

Sure. Timothy, I appreciate your questions. So let me answer the first part about the EBITDA. Look I think we've said clearly in the Q1 we were really investing and have brought some senior talent in the company. That was pretty much at least in three different locations including U.S. primarily last year, last year we did not have these overheads [ph] because now we have it. We have a solid team in play, that's all cash going out of the top line, below the top line. It reflected us in a positive way, but also of course it effected EBITDA reduction. I think we believe that this -- initially we've taken to the cost cutting as a very long-term strategy. It's not just the reaction of if we want to just improve quarterly. We want to improve the cost structure base line throughout the company. We are doing a lot more things, these was Phase 1 we concluded last month, we have another Phase 2 which is happening right now and looking at more strategically how we can really clearly be much more efficient, much more profitable global structure, where you can have much healthier bottom line. We like to -- quite frankly our internal goal is to have 30% net income at some point, which eventually we will get there. [Multiple Speakers].

You said 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. That is that we are -- our own KPIs between CEO and all the team management. And everybody listening to the call, they know that, from the company. I had said, this is what the goal we want to go after, and we'll get there. I think right now Timothy, our company is really levering economies of scale, efficiency, global network we have because now we're able to manage some sales distantly without even flying all over the world. We have an amazing team assemble 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, $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 as an investor also. We intended to, the second part of the question, we intended to buy back shares. And if you look at just last 12-month chart, we had 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, we believe that held us back in buyback. That buyback plan is still on and we will continue that, we didn’t buy too many shares, but our goal is to, where we can spear cash without disrupting our operation, we will absolutely buyback.

There were shares bought back in quarter just ended then?

Just a few. Nothing to brag about. But I think that plan will remain on. We are pretty conscious, we've given the press release, we want to do it. But again, if you are a CEO you have to first see without disrupting the operation cash flow. So we have $9 million, $10 million cash the bank, I like to see $20 million in the bank. To be much more healthier. It will happen as we get more receivables, new contracts and the bigger deals will come into play. So look, we're confident. We're committed. We have the largest -- in fact shareholders 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 with the Company.

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

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 go back too on the -- maybe Naeem, just the growth into '18, '19. 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 fiscal '17. 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 the 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 cannot -- I won't dwell on percentage, Mike, but I would just say that, as I said before I'll reiterate that the current deals we're getting now, they are premium clients. And obviously, we cannot name them due to confidentiality, but we're 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 size will continually growth. So the deals that we did, the large deals did a year ago is going to become more like a recurring trend, not an abrasion. So we still need the smaller deals because they create good recurring maintenance revenue and regenerate the strong service revenue from them as well. So I think the combination of the two but we're not really going for the very small deals anymore, because it's just essentially the opportunity cost of them. So we deployed people, we do not hire more people as we’ve said, we have the right scale now, we're looking at bringing more efficiencies and trying to deliver more with the same number of people. I think that’s the key to building a strong enterprise. And now these revenue targets that we’ve given you, we’ve consistently grown as you see, 15% CAGR or maybe even 20% over the last four years. However, we are now focusing on the bottom line so that we can -- because we know the revenues have grown, the top line is going to continue to grow. But how do we bring more profit in, and I think that’s 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 it's to how do we improve the EPS.

Okay. Well, I think it’s 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 the management and the board over the -- especially when we’re trading at $45 million market cap-in from one customer, we have a $120 million 10-year deal. So, that would be a suggestion on my part as a large shareholder. So, thanks.

Thank you, Mike, we appreciate that.

Yeah.

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

Well. Thank you again for joining us today and as always on behalf of board and management team throughout the globe, I want to thank our shareholders for their continued support. And we’ll see you next time. Thank you, Operator.