NetSol Technologies, Inc. (NTWK) Q2 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the NetSol Technologies Reports 2012 Second Quarter and Fiscal Year Conference Call. [Operator Instructions] This conference is also be recorded today, Thursday, February 2, 2012. I would now like to turn the conference over to our host for today, Ms. Patti McGlasson, General Counsel of NetSol Technologies. Please go ahead, ma'am.

Good morning, and thank you for joining us today to discuss NetSol Technologies fiscal 2012 second quarter results. On the call today are Najeeb Ghauri, Chairman and Chief Executive Officer; Boo-Ali Siddiqui, Chief Financial Officer; Naeem Ghauri, President of the Americas and Europe; and Shaz Khan, Senior Vice President, COO and Cofounder of Vroozi. Following the review of the company's business highlights and financial results, we will open the call up for questions. I'd like to remind you 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 aspects 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 pleased to report that we beat our revenue projection for the fiscal 2012 second quarter, which is a testament to the hard work and determination of the entire team at NetSol. After 2 consecutive challenging quarters prior to this quarter, and now with the company's performance improving, we believe our pipeline of products are well positioned to further capitalize on a business environment that appears to be shifting into positive territory. During the second quarter, I visited with NetSol developers and our sales team domestically in China, Pakistan and Saudi Arabia, and there is a growing sense of excitement as the company expands its global footprint, introduces new products to the marketplace and leverage its existing relationship with long-standing customers. The global economy is still working through a difficult period, but our second quarter results reflect an improving sentiment, evidenced in recently executed and implemented contract for NetSol's next-generation NFS solution and the positive traction we are experiencing for our smartOCI e-commerce search engine. I must state that response to our smartOCI solution in the last few months has been phenomenal. As of the close of our second quarter, our pipeline remains robust, up about 25% from the same time last year for NetSol's core solutions in addition to the growing funnel for our e-commerce division, Vroozi. That includes smartOCI. I'd like to also note that we anticipate continued sequential revenue growth of 10% to 15% in the second half over the first half. This trend gives us increased confidence in achieving profitability for the fiscal year ending June 30, 2012. Before taking a closer look at NetSol's second quarter results and the company's direction for the second half of the year, I'd like to review several recent business highlights that are contributing to NetSol's momentum. They include the successful go-live implementation of the next generation of our NFS fleet for Kiatnakin Bank, a leading provider of financial services to commercial and corporate sectors in Thailand. Now that our next-gen solution is going live in this year, we look forward to continuing to implement the solution to new and existing customers. We have a robust pipeline of NFS next-gen solutions, with 30-plus activities at different stages of development in China, Japan, Malaysia, Thailand, the U.S. and the United Kingdom. In China, we strengthened our partnership with industry-heavyweight Minsheng Financial Leasing by signing another agreement to implement our NFS solution. NetSol enterprise-leading solution became the benchmark in the banking industry in China as NFS went live with Minsheng Financial. The second phase agreement is important with the long-term commitment that kind of paved the way for implementing more leasing and financing solutions throughout the region. In the U.S., our Vroozi division announced a new professional services contract with LTC Supply Source valued at over $1 million. LTC is an emerging partner in the long-term care industry's procure-to-pay arena. Demand for smartOCI is continuing to rise in the U.S. and Europe, and Shaz Khan will provide more color on our progress with Vroozi later on today's call. And in September, we welcomed a new CEO to Atheeb NetSol Company Ltd., a joint venture based in Riyadh, Saudi Arabia. We are getting traction in this region for implementation of all our solutions and services in the public and private sectors, including defense and banking industry. These initiatives are helping NetSol adapt to an otherwise tepid business environment. Also working to our advantage is the ability to deliver quality solution with a strong value proposition. Many of our customers are dealing with a very fair economic conditions that we find ourselves in, but we have a competitive edge when going up against some of the largest software developers due to higher ROI. We are a focused and a quality-driven technology company that develops and delivers solutions to Fortune 500 clients worldwide. The bottom line is that our solution offerings are more robust than they ever been before. And we anticipate that demand will strengthen throughout the second half of our fiscal year. But before we can reap the rewards, we still have some progress to make. Our financial performance is improving sequentially, and that is an important and pivotal start. As some markets are showing resiliency and uptick in demand for our business offering, we believe it is onward and upward for the second half of our fiscal year. I like to now turn the call over to our CFO, Boo-Ali, to review the company's financial results for the second quarter. Boo-Ali?

Thank you, Najeeb. It appears we have reached an inflection point in the second quarter of fiscal 2012, where we assumed the losses from the previous 2 quarters. Much on past strengths from our strong top line performance, which ultimately helped us swing to a profit. We are still down on our year-over-year [Audio Gap] looks like there has been a break in the clouds as we hedge into the second half of the fiscal 2012. Revenues for the second quarter of fiscal 2012 totaled $8.6 million as compared with $10.4 million for the same period a year ago. Sequentially, our top line increased 38% when compared with the first quarter of fiscal 2012. Second quarter license revenue were $2 million compared with $1.1 million in the previous first quarter of fiscal 2012, reflecting the signing of new contracts. We are feeling increasingly confident that licensing fee will continue to improve in the second half of fiscal 2012. Total operating expenses for the second quarter of fiscal 2012 were $3.5 million versus $3 million in the second quarter of fiscal 2011 and compared with the expense of $3 million in the previous sequential quarter. The slight bump in operating expenses is mostly related to our joint acquisition of Virtual Lease Services with United Kingdom-based Investec, which we announced in October. We remain committed to continuing to monitor operating expenses closely in the second half of fiscal 2012. We reported second quarter net income of $320,000 or $0.01 per share compared with net income of $1.9 million or $0.04 per diluted share in the same period of last fiscal year. However, on a sequential basis, we swung to a profit in the second quarter versus the $1.5 million loss we reported in the first quarter. Looking ahead [Audio Gap] percent for the second half of fiscal 2012 from the first half. Additionally, as Najeeb stated earlier, we anticipate achieving profitability for the whole year. Historically, our second half of the year is a stronger period for NetSol. I would now like to turn the call back over to Najeeb to provide more detail on the second quarter, as well as summarize our strategic growth initiatives for the remainder of the year. Najeeb?

Thank you, Boo-Ali. Our second quarter performance is a nice improvement when compared with the previous 2 quarters. Now it is time to build upon the momentum and continue to drive enhanced shareholder value. As you may know, NetSol's stock has been trading below $1 for several months. We do not want to lose our NASDAQ listing, nor do we feel a reverse split. With the grace period ending at the end of February, we are confident that we will qualify for an automatic extension. The extension will provide an additional 6 months for the stock to trade above $1. It goes without saying that we believe the stock is grossly undervalued at these levels. But while performance is king, we'll also maintain consistent communication with our existing shareholder base, as well as introduce NetSol's story to new institutions, retail investors and to new research analysts. Thankfully, we have a lot of exciting developments at the company, and our second half is already shaping out to be a very prolific period. Before catching you up on business initiatives in each of our regions, I'd like to give the call to Shaz Khan, our Senior Vice President and Cofounder of Vroozi, to discuss the significant stride we are making with our e-commerce division. Shaz?

Thank you, Najeeb. Indeed the first half of fiscal 2012 was an important period for Vroozi. Our smartOCI solution continued to gain traction in the marketplace, culminating with a multimillion dollar implementation agreement of the SAP procurement and smartOCI platform with LTC Supply Source, which we announced a couple of weeks ago. We are regularly meeting with prospective customers, including many Fortune 500 companies and their respective purchasing organizations. We are pleased to announce the successful live implementation of our smartOCI system, and several of these companies have signed implementation agreement for which we anticipate recognizing revenue during the next 12 months. In addition, Vroozi is attracting top industry talent, and I'm pleased to announce the hiring of Michael Sandel [ph] as our Vice President of Technology. Michael is an alumni of Shopzilla, one of the largest business-to-consumer price comparison shopping engines on the Internet, and he is an influential technology leader and visionary in the business-to-consumer and business-to-business e-commerce space. What makes our cloud-based smartOCI solution so compelling to the marketplace is its ability to seamlessly integrate with companies' eProcurement systems to provide a Google-like B2B shopping experience. For example, let's say on a manufacturing company that needs to order more sheet metal. SmartOCI will help employees identify sheet metal suppliers with the ease and efficiency of a supercharged search engine. At the close of the second quarter, we had more than 25 active leads in the United States and Europe. With thousands of global companies in need of procurement systems, the road ahead for smartOCI looks very promising. The key objective in the next 12 months will be installing the system and generating consistent revenue from implementation, subscription and professional services. We look forward to keeping you informed of our progress. I would now like to turn the call back over to Najeeb. Najeeb?

Thank you, Shaz. The origins of the cloud and our core software, IP-included NFS and smartOCI is an important step to NetSol's growth strategy, and I'm proud of the accomplishments of our Vroozi team. As one of the emerging growth stories of NetSol, I look forward to reporting news about contract wins and implementations in the second half of this year. I'd like to take a moment to catch you up briefly on strategic initiatives in each of our region, so let's begin with our Asia-Pacific region. As I mentioned earlier, we have a very strong pipeline throughout this year, including China, Japan, Malaysia and Thailand. We have formed partnerships with companies in each of these countries, while -- they provide us with a nice entry to a new business in these burgeoning marketplace. A few other important developments included going live with the NetSol Financial Suite projects for a Fortune 500 company in Korea, the signing of a multimillion agreement to implement our NFS solutions for a major European automotive manufacturer in Malaysia and the go live of our NFS solution at Daimler Financial Services in India. We delivered our fourth implementation in India from our NetSol Thailand office as we have created an automated delivery center in Bangkok to enhance our global delivery model. While we only generate around 5% of revenue from Pakistan, we are engaged in select new projects in Pakistan, in sectors including financial services, education, utilities and telecommunications. Moving over to Europe, the ongoing debt crisis has posed challenges for many of our customers. However, the economic environment has also opened up opportunities as many companies seek lower-cost solutions with the same high-quality performance they receive from our larger competitors. As a result, we continue to form strategic partnerships and win the business throughout the region. We recently embarked on an automation program for a major European bank, including our LeaseSoft portal. We also engaged in investment services integration project for a U.K. consumer loan businesses. This project will deliver a fully integrated loans platform that will result in enhanced customer service and portfolio management by connecting all branches and the national customer service just through a single data source. Europe is an important market for NetSol, and we are well poised to benefit from our increased traction in the region as the economy improves. Earlier, we reported an acquisition of a U.K.-based Virtual Lease Services in partnership with Investec as a finance -- to enter lease and finance business outsourcing industry in the U.K. markets. This acquisition was aimed to enhance our breadth in the U.K. market and to provide complementary offerings to our current client base and to expand market share. The integration of VLS with NetSol was seamless and strengthened NetSol's position in the marketplace with a solid financial institution in the U.K. Let me now provide a good update on Brazil. You may recall we formalized a joint venture with Brasilinvest at the end of last summer. I'm pleased to report that we continue to make progress with our South American partner to attend required legal and corporate documentation to be able to launch NetSol Brazil in Brazil. We expect to ramp up operations with Brasilinvest in the next few months and introduce all our solutions to this vibrant marketplace. For more than 3 decades, Brasilinvest Group has provided development services for businesses across sectors, including automotive, financial, agriculture and utilities. Looking ahead, we intend to leverage Brasilinvest relationship and unleash the power of the BRIC nation. In North America, Shaz already provided an update on development with our e-commerce division, Vroozi. I'd like to note that we have hired about 9 new programmers for Vroozi following the successful traction we are experiencing with smartOCI in the U.S. Our legacy business is also progressing nicely in North America. We recently introduced an enhanced version of our LeaseSoft solution, which is being actively pitched to customers for additional licensing revenue. The functionality of this new version is impressive, and so far, the reception has been excellent. We also signed additional enhancement projects with 3 of our U.S. major customers. Adaptability has been the key to maintaining our business in a weakened global economy, and this characteristic, along with several others, has enabled us to maintain the relationship and expand our global presence. Before opening the call up to question, I'd like to briefly define the characteristics that are empowering NetSol in the second half of fiscal 2012. Number one, for the past decade, we have been able to win contracts over companies that are 10x our size. Why? Because we are a world-class end-to-end software solution for running leasing and finance business operations. And I believe we are the most talented group of developers in the world. They are working tirelessly to accomplish projects on the highest level of professionalism and integrity, which we know is what separates the wheat from the chaff in this or any business. They're the reason NetSol has a 100% delivery and implementation record and has never lost an NFS client. Secondly, they continue to do and develop solutions that are innovative and indispensable. Definitely, Vroozi is rapidly becoming a significant growth engine for the company as smartOCI attracts a whole new segment of business. We're just beginning to factor smartOCI into our revenue model, and Shaz and his team have done a phenomenal job introducing this product to prospective customers. I look forward to keeping you abreast of new contracts as the remainder of the year unfolds. And finally, we have a global presence that enables us to deliver topnotch solutions in all key markets around the world and an established trends in China, Thailand, the U.S., the U.K., Pakistan, Saudi Arabia and now Brazil, truly diversified in the regions and the customer base we serve. In conclusion, our goal is to harness these characteristics to further fuel the business, grow our top line, improve our bottom line, bolster our assets and ultimately enhance shareholder value. In the second quarter of 2012, we beat our revenue expectation by 38% and reported a profitable second quarter. And I can assure you that we are fully committed to further improving our financial performance of the company in the years ahead. On behalf of NetSol's management, I'd like to thank our loyal customers and you, our shareholders, for your continued support. I'd like to thank our devoted employees who make NetSol a provider of the highest-quality solution in the world. I now like to open the call up for questions. Operator?

[Operator Instructions] And our first question comes from the line of Mike Vermut with Newland Capital.

Can you just go into a more detail, I guess, about the smartOCI marketplace, how large the potential is, what you're looking at, what the goals are for that? And then also on that, are you getting any support from SAP or some push from SAP into their customer base?

Yes, I'll let Naeem lead this, and then Shaz will come in to help to your second question.

Yes, smartOCI really is, for us, quite a big diversification from our traditional business. And the last 6 months especially have been very exciting, where we are, at times, proactively approached by large Fortune 500 companies to demo the solution. And then we had over 5 signed contracts and engagements and projects already started. The potential is great because we're building within Vroozi. SmartOCI is just one piece. We're actually building a future marketplace, where buyers and sellers meet in a B2B environment. So there's very little out there in terms of how our technology will be deployed. It's clearly a game-changer, and for a new entrant to come and win business against very established players, we're offering something quite different and unique as a user experience to our potential clients. So Mike, we see great things happening going forward. And maybe Shaz, you might jump in and add some more color.

Yes, thank you. Mike, this is Shaz. With regards to the second question on the SAP support, we are an SAP partner. SmartOCI is an SAP-certified product, and we received tremendous support from SAP management, as well as some of their procurement experts in this space on a global level. They're continuing to provide and send leads our way for companies that are looking to optimize their procurement process, and it's a win-win for both parties. SAP's focus is to generate more license sales for their core eProcurement offering, and smartOCI fits right into that puzzle.

Great. And just one again, like how large is the market potential here for smartOCI?

SmartOCI currently is a SAP-centric product. The install base for SAP procurement implementations is about 1,200 clients running the supplier relationship management platform, which smartOCI integrates with. And then you have another 20,000 clients that run core SAP purchasing on a global scale, which smartOCI also integrates with. So the market space is quite huge as you know SAP controls about 65% of the Fortune 500 enterprise resource planning market. And we feel very bullish about our relationship with them and look forward to growing the business.

Excellent. So when you look down the road, 3, 4, 5 years, this could be the largest part of the business?

I'll jump in. Well, it has to grow into a long-term sustainable business, Mike. Again, NFS has been going 15, 16 years solid. SmartOCI is a new business for us, so hard to project figures, but in terms of traction and in terms of interest, we're getting far more interest at this stage than we ever had on NFS in the early days. Certainly, our timing is great because, as you can imagine, there's more efficiency needed in any business process, and procurement is one business process which basically, you part with a lot of cash when you buy something. In big corporations, when they look at these processes and if you bring in even a 3% or 4% savings and, in fact, we can deliver bigger savings, when you look at just using a search engine to bring a buyer tool to a server, you can save a percentage of your spending budget. That's a huge USP. So really, this is beginning to grow faster than we imagined. We didn't expect to be -- we have about 6 live clients now. And we will be at the SAPPHIRE show in May, which is a global SAP show, the biggest in the world. And we believe that's the start of our first real marketing initiative for smartOCI and Vroozi because so far, it's been more soft marketing and through referrals from SAP, as Shaz said. So we haven't actually gone to market yet. So we're very excited what happens the middle of the year and the amount of interest we're hoping to generate.

[Operator Instructions] And our next question comes from the line of Daniel Nye with CIM Investment Management Ltd.

Just a couple of questions. Can you give me some indication on what your license revenues look like for the upcoming quarter?

Yes. Naeem, you want to come in?

Yes. No, we can't give you exact numbers, right? Because we are still in the quarter, and we cannot disseminate that information yet. However, we are tracking better than the previous quarter. And as Boo-Ali said earlier, that our second half is always stronger than our first half, traditionally, at least. And it seems that way. And in terms of the guidance we gave today, we're very confident that we'll beat the first half by at least a 10% to 15% margin.

Okay, that's fine. And the last question I have is with your accounts receivable. First of all, great job bringing it down. I know I've been tracking this for a while. But if you can give me some indication on your accounts receivable of how much of that $12 million that I show is greater than 90 days and greater than 180 days.

Well, first of all, Dan, this is Najeeb. Most of the receivables are in Asia-Pacific, China, Thailand, Japan and so forth. And Boo-Ali, do you want to give more detail on the timing?

Yes. You can see from $12 million, I think 1/3 is more than 180 days and the remaining is within the period of 60 to 180 days.

Okay. And do you see any risk in receiving those payouts greater than 180?

Can I just jump in? What happens in Asia, Daniel, is that in terms of payment terms, they're not traditionally what we get in the West. We've experienced now for the last 10 years, Thailand and Singapore and Japan and Australia was really not so bad. But certainly, the far eastern countries and China, especially, they just don't have this as their best practice to pay in 90 days. They actually do pay, and I cannot remember, Boo-Ali, if you'll remind me, if we ever had to write anything major off. But certainly, we are very confident that these are recoverable, and 180 days is not uncommon. I mean, traditionally, over the years, 180 days is very much a reality in Asia. But these are good, solid receivables. And as you can see from how much money came in over the last 2 quarters, that they do pay in the end.

Okay. And just one related question on that. Your revenues and excessive billings have increased also, have increased. Can you help me understand why those have gone up?

I think it's more to do with China again. And Naeem will explain how the...

Well, same issue. But we essentially have done work, okay, ahead of time as some of these payment terms are -- okay, so we do a deal and say, you cannot bill us for 3 months or 6 months. Typically, in the companies set up in China, in the first few days, months, they don't have ability to pay because they're still waiting for their license, et cetera. So we continue to do the work, and we revenue it because as we deliver and as we perform the services, according to GAAP, we are able to bill it. We are able to at least recognize revenue. And then we start billing according to our payment terms, which sometimes trigger later. So this is also quite normal.

And there are no additional questions in the queue at this time. Management, please continue.

Well, I thank you all for joining us today, and we'll see you in the next quarter. Have a good day.

Thank you, ladies and gentlemen. That does conclude that NetSol Technologies Reports 2012 Second Quarter and Fiscal Year Conference Call. If you would like to listen to a replay of today's conference, please dial (303) 590-3030 or the toll-free number of 1 (800) 406-7325 and entering the access code of 4509594. Thank you for your participation, and you may now disconnect.