Christopher Chu – IR, Grayling Global
Najeeb Ghauri – Chairman and CEO
Tina Gilger – CFO
Naeem Ghauri – President, European Region and Global Products
Mitch Van Wye – COO
Matthew Weiss – Maxim Group
Joe Giamichael – Rodman & Renshaw
NetSol Technologies, Inc. (NTWK) F1Q09 (Qtr End 09/30/08) Earnings Call Transcript November 13, 2008 11:00 AM ET
Greetings, and welcome to the NetSol Technologies fiscal first quarter 2009 conference call. At this time, all participants are in a listen-only mode. And a brief question-and-answer session will follow the formal presentation. (Operator instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Christopher Chu of Grayling Global for NetSol Technologies. Thank you, Mr. Chu, you may now begin.
Thank you, operator. Hello, everyone, and thank you for joining us on the NetSol Technologies fiscal first quarter 2009 financial results conference call for the period ended September 30th, 2008. I hope you have found the PowerPoint presentation we have prepared to supplement this call and will follow along with us. The slide numbers we refer to are found at the bottom of each slide. The presentation may be found on the main page of the Investor Relations section of the NetSol Web site located at www.netsoltech.com. That’s netsoltech, T-E-C-H, all one word, dot-com.
In addition, I would like to remind you that we are recording and webcasting today’s call. The webcast archive of the call will also be available in the Investor Relations section of the NetSol Web site. You can access the webcast link and presentation by going to the Investors Click Here tab, and then selecting the presentations and conference calls tab in the menu. Please proceed to slide number two as I read a brief Safe Harbor statement.
This conference call and presentation may contain forward-looking statements. These statements reflect the current belief of NetSol Technologies management as well as the assumptions made by and information available to NetSol. Forward-looking statements are not guarantees of future performance, and involve risks and uncertainties. Actual future results and developments could differ materially from those set forth in these statements due to various factors.
These factors include among others, changes in the general economic and competitive situation, particularly in NetSol’s businesses and markets. In addition, future results and developments could be affected by the performance of financial markets, fluctuations in exchange rates, and changes in national and international law, particularly with regard to tax regulations. The company assumes no obligation to update forward-looking statements.
Moving to the slide number three, during today’s call Mr. Najeeb Ghauri, Chairman and Chief Executive Officer will share key achievements for the recently completed fiscal first quarter 2009, recap the company’s recent financial statement as well as a review of the strategic outlook for the year. He is joined by Tina Gilger, Chief Financial Officer, who will review more specific details of the financial results. Mr. Naeem Ghauri, Europe Division President also joins today’s call, and will be available in the question-and-answer session.
I would now like to pass the call over to Mr. Najeeb Ghauri. Najeeb, please go ahead.
Thank you, Chris, and good morning, everyone. And thank you for joining us today. If you join me on slide number four, you will see that NetSol delivered the year-over-year improvements in its revenue, GAAP net income, and EBITDA performance in fiscal first year of 2009, with top line revenues rising roughly 8%, and GAAP net income rising 21%, and EBITDA – and 20%, respectively.
These year-over-year gains are based on the strength offered by our comprehensive range of cost effective IT solutions, the geographic diversity of our global customer base and client delivery platform, and the first quarter positive impact of favorable exchange rates. NetSol experienced growth in license fee within our core NetSol Financial Suite or NFS as well as rising interest for our global business services in what is historically our seasonally slowest quarter of the fiscal year and despite a challenging global economic environment.
Before turning to the detailed operational and financial review, I’d like to address upfront NetSol’s recently released statement of certain historical financials as filed on November 10th. As you know, on November 5th, the management of the company concluded, after consultation with our independent registered public accounting firm and as a view of the pertinent sects, that the previously issued financial statements contained in the company’s annual report for the prior three fiscal years should be restated due primarily to computational errors in connection with the allocation of appropriate amounts to minority interests in the statement of operations and the calculation of minority interest ownership.
As a result, our management, in consultation with our independent auditors, has determined that the financial statements included therein overstated the amount of our reported net income for the year ended June 30, 2008, and understated losses for the years ended June 30, 2007 and 2006. As you know, these are differentials signed off by the principal auditors. In order to lend further clarity to these calculations, Tina will provide additional detail later in the call.
As a company, this is the first instance in over 10 years of our public company history that we have had to restate our financial statements causing a negative impact. I’m personally and deeply disappointed with this accounting error. And after a detailed assistance of the errors with finance experts and management, we have decided to initiate a program of restructuring our Accounts and Finance Department. This program includes a change in people in processes. These changes are imminent, and we’ll be sharing these with you as and when they occur.
I believe once restructuring is complete, we would have implemented a strong set of additional checks and balances into our financial reporting. In addition, we have already taken the following specific steps to address the issue to ensure that our shareholders, customers, regulators, and analysts get a greater degree of comfort with our past and future financial statements.
First, we have filed very quickly the appropriate amended financial statements with the US SEC within just five days of the identification of the potential issue. Second, we are currently well along the process with regards to writing and naming the new CFO. As announced, Tina will be moving on to pursue another endeavor, but will be onboard with us through November 30 to assist in the transition. And we anticipate having appointed the CFO during that timeframe. Third, we are also taking additional steps internally with regards to reviewing financial controls to help ensure such issues do not happen again.
As I spoke on our last quarterly call, NetSol has retained an affiliate of one of the Big Four accounting firms as our servings of recession 404 consultants. The firm has been assisting NetSol as consultants for such 404 evaluation and documentation processes of our internal controls ahead of fiscal year 2010 audit. We believe our hiring of a Big Four firm certified for internal audit under both the US and international channels with 40 years of advisory expertise illustrates NetSol’s commitment to proactively addressing such 404 internal control compliance requirements.
Please be rest assured that the company takes these actions very seriously, and does so in conjunction with and the support of our Board of Directors and the audit committee. I place no high priority above a strong financial reporting function and high ethical business standards as we look to continue the robust growth NetSol has experienced. This incident cannot overshadow the prospects and tremendous potential of NetSol that everyone in the company is working with dedication to realize.
Now given the global – ongoing global economic challenge for the last few months and probably the worst time in my memory, we have taken some very basic cost reduction steps. We have frozen many men’s salary increases since July 1st, 2008 to continue at least another year. We have cut back at least two sales offices in Pakistan, and have reduced staff by 340 people there. The (inaudible) returns and bonus of approximately $410 for the company in July 2008 to help support the company’s growth, no further plans for any M&A for at least throughout the fiscal year, we undertook significant reduction in development cost in both the US and UK operations this year, and we’ll remain focused in growing our business organically with improved bottom lines.
That being said, if you join me on slide number five for some top line strategic business highlights for the fiscal first quarter. My conviction and belief in the business growth opportunities in America could not be stronger. We have been investing in brand positioning, hiring new US based sales and marketing personnel, making significant improvements in NetSol’s infrastructure and product offerings. I have no doubt that the contributions for US based revenue and earnings will be the strongest in the near future.
During the quarter, we opened our new global headquarters in Emeryville, California, providing the larger centrally located high-tech facility to accommodate NetSol’s growth strategy. With this new facility, operational – we hosted our 2008 Annual Customer Solutions conference in October with a focus on NetSol’s social charity, global BestShoring client delivery initiatives, and presentations on a wide range of topic areas, including the NetSol Financial Suite product offerings. This year marked our most successful event ever, with more than 30 global clients participating. I am pleased to say that following the event, we are exploring a wide range of potential cross selling opportunities among current customers for the NFS offerings and global business services.
During the quarter, we launched our new global business process outsourcing or BPO service as a new revenue driver within the company’s BestShoring process business model. In our European division, we launched our managed IT services division to leverage our BestShoring business model in Europe as well as successfully launching a multi-product (inaudible) in Europe reflecting an enhanced ability to service auto leasing and (inaudible) markets in Central and Eastern Europe.
We are seeking increased penetration for the high growth Middle East market, including a growing regional sales funnel following our contract with – in the region with Al-Amthal Leasing, one of the largest leasing companies in Saudi Arabia. As we had anticipated, we are experiencing exciting new business opportunities with major groups in the UAE, the region, demanding a (inaudible) center excellence programming and development facility and resources.
And before we build our brand and shoulder base in the Middle East region to support our Dubai International Financial Exchange market listing, I am pleased to say that NetSol will be participating in NASDAQ Dubai Investor Conference on November 20th and will be co-hosting the first internationally based NASDAQ opening ceremony with some of NASDAQ’s leading listed company CEOs, along with the NASDAQ CEO and DIFX CEO.
Subsequent to the end of first quarter, we announced the acquisition of Ciena Solutions, a US based SAP systems consulting services firm, more of this later on in the call.
If you move to slide number six, we’ll look at a diverse range of key customer wins during the quarter, which will contribute to fiscal year 2009 growth. The key wins include, securing the new frame agreement with Daimler Financial Services, NetSol’s longest standing customer, extending NetSol’s relationship into the regions of Asia Pacific and Africa. Mercedes Benz Financial Services Taiwan went live with NetSol’s LeaseSoft offering within the NetSol Financial Suite. Also, resigning of the new traction we are getting in North America. We secured a multimillion dollar NetSol Financial Suite contract with the North American finance division of a major Asian based automobile manufacturer. This was the highest of valued contract have been in the US for NetSol. Our European division side and multimillion dollar agreement with a major European bank to service auto leasing and (inaudible) finance market in Central and Eastern Europe. And finally, our Asia Pacific group won a multimillion dollar contract with a leading Korean leasing company for our LeaseSoft Solution Suite.
Looking to slide number seven, we look at NetSol’s recent acquisition, Ciena. Ciena Solutions is a US based SAP systems consulting specialty firm, which was announced. And the transaction closed in October, subsequent to the close of the fiscal first quarter 2009. NetSol acquired Ciena Solutions, which is headquartered in LA, Los Angeles, with a branch office in San Ramon, California, for a combination of cash and restrictive stock. Under the terms of the agreement, considerations for the acquisition is to be deferred over four years based on an earn out formula linked to Ciena Solutions’ performance. NetSol intends to use internal cash resources to pay for the cash component of the transaction, and would not be issuing any shares related to the stock component of the transaction until the first quarter of fiscal year 2010.
The latest step in the US – in our US market expansion plans as a vibrant and global SAP practice and to rise in entry into one of the largest markets for information technology solutions and services within the industry, with established SAP practice areas and industry recognized thought leaders. The acquisition of Ciena Solutions offers our global customers an ideal combination of SAP application and business transformation services and broad range industries and sectors. Ciena Solutions customers include leading companies such as Axeda, Healthnet, SAP America, SGL Carbon, Southern California Edison, and Ticketmaster, among others. I am pleased to say Ciena Solutions is profitable and experienced double-digit growth in revenues and profits in the past year. Please note, we have filed an 8-K with more comprehensive details of the transaction for reference.
This concludes my opening remarks. I would now like to turn the call to slide number eight, and hand over the call to Tina for a detailed review of financial results for Q1 2009. Tina, please.
Thank you, Najeeb. Good morning, everyone. Thank you for joining us on today’s call. Before I begin the first quarter walk through, I wanted to provide some additional granularity on the released statement Najeeb mentioned earlier.
At the timing of our IPO firm, our Pakistan subsidiary we conducted in August 2005, we made classified certain purchases, including officers and directors as affiliate with the parent. As they were classified as affiliate, we included their ownership as part of the parent’s ownership for purposes of calculating the minority interest adjustment and subsidiaries. In recent discussions with our auditors, it was determined that although these parties were affiliates, the affiliate ownership should not be included in the parent’s ownership. Together with the auditors, it was determined that minority adjustment involved from this changing ownership percentage of 9.26% was material and necessitated a restatement of the fiscal years ended 6/30/06, ’07, and ’08.
In fiscal ’08, the subsidiary issued bonus share dividends to shareholders. In calculating the amount of the minority interest adjustment, the net income of the subsidiary is multiplied by the minority interest percentage. The calculation had inadvertently reused the net income after the bonus dividend rather than before it. It was only after filing of our 10-K and during the preparation of our 10-Q that this formula error was detected. We immediately took measures to correct the error, and as it was material, a restatement was necessary. The only changes in the restatement relates to the change in the ownership percentage of the parent versus all of the holders and the miscalculation of the minority interest dividend. There was no effect on all other amounts in the income statement. Please refer to our detailed finances as provided in our recently filed amended form 10-K for additional information.
Now, let me walk you through some key quarterly perspectives starting with the first quarter fiscal 2009 top line results.
As you look at slide number nine, you will note that NetSol’s top line revenue growth remains consistent over the last five years reflecting a robust compound annual growth rate of 68%. In our seasonally slowest fiscal first quarter, revenues increased approximately 8% year-over-year to $9.3 million, roughly in line with expectations.
Turning to slide number 10, we take a look at the major components of revenue for the fiscal first quarter as compared to the year ago period. Our first quarter revenue was driven by a solid 33% increase in license fees, as service and maintenance fees are recently in line with the year ago period. The quarter’s licensing segment was highlighted by multimillion dollar contract wins. Please note, service fees related to license contracts are reported on a percentage of completion basis. As such, these revenues are spread out over several quarters as the implementation, date of conversion, training, and (inaudible) from the contract are completed.
NetSol achieved gross margins of 51% in the fiscal first quarter versus 61% in the year ago period, and the lower (inaudible) permanently due to the recently hired specialized consultants under (inaudible), the increase in depreciation as we have invested in the infrastructure of our business, and more travel to current sites determined in the current fiscal quarter.
Slide number 11 shows the breakdown of revenues by business. For the first quarter fiscal 2009, as a percentage of total revenue, IT consulting and services represented 56%, license fees represented 27%, and maintenance fees stayed relatively stable at 17%. On a geographic basis for the first quarter fiscal 2009 as a percentage of total revenue, Asia Pacific represented 66%, Europe represented 18%, and North America represented 17%. The rise in North American contribution has nearly doubled from Q4 of fiscal year 2008, despite the initial cuts from our (inaudible) and marketing focus in the region under the successful guidance of Mitch Van Wye, our Chief Operating Officer.
Slide number twelve shows the breakdown of the operating expenses for the first quarter fiscal 2009 as compared to the year ago. Total operating expenses increased 18% year-over-year. However, as a percentage of revenue, the increase is only 3.6%. The rise in operating expenses is primarily related to our ongoing investment in our global sales and marketing resources, particularly in North America and Europe as well as expanding our base of global delivery centers to diversify our customer delivery platform and support clients with regionally aligned, low cost, offshore development centers. Looking ahead, we have (inaudible) centers from balancing growth and expenses while focusing on profitability.
Moving on to slide number 13 and a look at GAAP EPS, our fiscal first quarter marked NetSol’s sixth consecutive quarter of GAAP profitability. NetSol’s GAAP net income applicable to common shareholders increased to $1 million or $0.04 per diluted share, the EBITDA net income of the $144,000 or $0.04 per diluted share in the year ago period.
This quarter GAAP net income increased the positive impact of its $2 million foreign exchange currency base recorded mainly by our Pakistan subsidiary as exchange rates around the globe fluctuated. Most of the accounts receivable and sales are recorded in currencies other than the Pakistan rupee, unless duly stated according to US GAAP to the current value as of the end of quarter, resulting in either a gain or loss due to foreign currency.
Minority interest income detected was $1.6 million for the first quarter. Minority interest income as related to the minority interest in several of our subsidiaries as the aggregated net income attributable to the minority owners must be directed to NetSol’s earnings.
Slide number 14 illustrates NetSol’s EBITDA performance on a quarterly basis over time. First quarter EBITDA rose 20%, with $2.3 million or $0.08 per share marking the eighth consecutive quarter of positive EBITDA results. The EBITDA margin for the quarter was 25%. EBITDA is defined as earnings before interest, taxes, depreciation, and amortization. The company uses EBITDA as a measure of its operating trends. Investors are cautioned that EBITDA is not a measure of liquidity or financial performance under generally accepted accounting principles. The EBITDA numbers presented may not be comparable to similar measures recorded by other companies. EBITDA, while providing useful information, should not be considered in isolation or as an alternative to net income or cash flows as determined under GAAP. We believe EBITDA is one of the best metrics to measure the underlying profitability of our business.
Briefly touching on our balance sheet, NetSol ended the quarter with approximately $9.8 million in cash and cash equivalents, up from $4.8 million in the year ago period.
I would like to take the time now to express how much I have enjoyed with – working with NetSol over the past five years, and believe in the potential of the company’s growth. It is a very difficult decision for me to give Najeeb my resignation last month. I am leaving NetSol to pursue a new career in a different field. I am fully committed to facilitating a smooth transition with the new CFO, and with all of our shareholders, investors, and employees for that.
I would now like to turn the call back to Najeeb to review the 2009 outlook and some closing remarks. Najeeb?
Thank you, Tina. Thank you again. On slide number 15, you would find our full year fiscal 2009 financial guidance. We have evaluated the current global economic conditions very carefully and recent developments within many major sectors, industries, and geographies in which we operate. Accordingly, we believe, it is prudent at this time to make some adjustments in our guidance for fiscal 2009 to account the changes in the global economic environment.
We are currently forecasting a new growth revenue of – growth of 20% to 25%, which I believe is still being positive considering the environment around us. Our growth margin target between the high 30% [ph] to 50% range, our recent forecast for fiscal year 2009 diluted earnings per share is $0.25 to $0.30 per share, and our forecast for EBITDA margin in the range of 25% to 30% revenue. Overall we continue to forecast solid year-over-year gains in revenue and profitability for fiscal ’09 despite the current global economic slowdown driven by the diverse range of growth drivers outlined in slide number 16.
Our investment in sales and marketing, new geographic markets as well as new revenue drivers such as our high end BPO and SAP services, are designed to insure that we have the right foundation of growth drivers in place to best serve our customers and shareholders right.
In conclusion, NetSol is healthy and strong, and are more committed than ever to building on the momentum we have established in growing NetSol into a leading global IT services provider, ultimately moving towards – to build shareholder value. The reasons we extended our $1 million share repurchase program reflecting our belief that based on the value we see in our shares, NetSol represents one of the best investments we can make, both the company and outsiders regularly buying at full shares to reflect our confidence in our business and its outlook.
With this, I would now like to turn the call back to the operator to facilitate the question-and-answer session. Operator, please let’s take the first question.
Thank you. We will now be conducting the question-and-answer session. (Operator instructions) In order to allow everyone the opportunity to ask a question, please limit yourself to two questions per person. If you have further questions, you may re-enter the queue. One moment please. Our first question’s coming from Matthew Weiss with Maxim Group.
Matthew Weiss – Maxim Group
Good morning, everybody. How are you?
Good morning. Thank you very much.
Matthew Weiss – Maxim Group
A handful of questions here, first, if you could just tell me, I think it was the prudent thing to do with the guidance. Could you just tell me now what your expectations are for – in terms of what’s built into the guidance now, for things to stay the same, if things deteriorate further, if things improve? Can you just sort of tell us what kind of expectations you’ve built in there?
Yes. Thank you for the questions. We are quite busy with our NFS application, like LeaseSoft and LeasePak in all the markets. There have been growth and activities from the US, Europe, and Asia, especially, that’s one factor, and we would see continued traction in that area. We’re also very busy in our offshore communities where we have some interest going forward from the UAE markets. And as (inaudible) to you, we’ll announce it. So we have built in some progress there. And I’m sure Naeem and Mitchell have some more color, they’re both on the call, to see what their perspective of where we’re going in terms of further developments.
This is Naeem here. Just basically to just expand on what Najeeb is saying that we have achieved tempered guidance based on the environment around us, not necessarily based on any major slowdown we’ve seen in our business. And we have been continuing to see good prospects from within Europe. We’ve seen the UK market slowdown a little bit from last year. But we are seeing additional interest from some of the emerging markets and some of the other European countries as well as China. So on the LeaseSoft Financial application, we expect the license sales and services revenue to continue to grow quite attractively over this fiscal as well.
On the services side, we’ve seen some slowdown. However, we don’t see that as a major issue – effects on the overall numbers for the year. So as I said, the guidance is basically tempered based on what could come ahead, not what we have already seen.
Matthew Weiss – Maxim Group
Okay. That’s very helpful. Thank you. And then, generally speaking, the last two weeks of the quarter, for pretty much every company out there, were particularly rough. Were there any specific deals towards the end of September that you have anticipated closing there, or maybe put on hold or pushed out? If you could just tell us what the environment was like there? And if it had any significant impact on the quarter recorded?
Matt, I think the last six months there’s definitely some delays better than Pakistan or in China due to the environment, due to the change of condition there. But that’s why we built in our revision or trimmed our top line. But we still believe, as Naeem said that there is a lot of interest going forward with our solutions, like in sales and the two other things we’re doing. I really believe that we’ve – what we have enclosed in June 30 fiscal and/or Q1 that we’ll probably move into the Q2 in the subsequent quarters are going forward.
Matthew Weiss – Maxim Group
Okay. That’s good. And then on the Ciena acquisition, it seems like this could be a huge opportunity for you guys to get into as it is, consulting division. Maybe you could talk about if you’ve taken any contribution from Ciena into ‘09 numbers. I think this is sort of a longer term opportunity. So maybe you could just speak to sort of two or three years out where you see this opportunity going.
I would let Naeem – actually Mitch come in. He is directly working with our new team in San Francisco. Mitch, do you want to step in please?
Mitch Van Wye
You bet. Good morning, everyone, or good afternoon, as the case may be. We are very excited about the Ciena acquisition to the NetSol family. We are working closely now and over the next 45 days to fully integrate Ciena into the NetSol Technologies operations. Clearly, one only has to look at the difficulties when the integration of a new company into an existing and take place. But we’re going out of our way to make sure that we mitigate those issues. As far as moving forward, I can say that Ciena is projecting a very healthy growth in their revenue contributions to the NetSol organization. I think that they have a very healthy pipeline, and given the kinds of companies and clients that they are working with today, I expect very favorable performance. I do not believe that we included this – Ciena’s information in the ‘09 numbers. But I can tell you moving forward, they should play a very important role I think in the overall growth of the company.
And also, Matt, Naeem has a lot of theories over the SAP. Naeem, do you want to add some color?
Yes. Matthew, this is a very strategic acquisition for us and to moving into a very high-end high margin business. The Ciena team is very young and aggressive. They’ve grown this business into a point where they need a bigger partner. And I think as soon as we’ve come onboard with them, they started seeing more traction in the business. And I think they’ve recently concluded the deal, which we are going to be announcing shortly. So really these two companies in combination will work much better than Ciena were doing on their own. And as Mitch said, we’ve not factored in much in terms of our 2009 fiscal revenue or profits from Ciena, but I think as these deals mature and some of these revenues start to come in, we may be able to update Q2 and Q3 on whether or not – what the impact of the Ciena combination is to the company.
Matthew Weiss – Maxim Group
Okay. Great. And then just a couple of quick financial questions and I’ll hop back in queue, traditionally, obviously the second half of your fiscal year is seasonally the strongest. Will that sort of imply, based on your guidance, that you expect the fiscal second quarter to be flat to marginally up from a top line perspective based on what we saw you guys put up this quarter?
Well it is historical pattern. The second half has always been stronger in our business, and you’ll see how we’ve come out with Q2. And that’s only the perfect time to see how things went into Q2. But we are still – the whole team is very busy in the sales side, especially in the closing, and then from the business side, so.
I just have quick add on. I mean the climate that you see, and you probably had more exposure to businesses out there, the public businesses, and you can see, it’s a crazy brutal climate out there. So really going forward, what the future holds, nobody knows. But certainly, we’ve been very fortunate that we are in a space where with the downturn companies need for efficiency in their processes. And I think sometimes they look at it this way, if the business is slow, they put more investment into making their businesses more efficient and cost effective, so they make that investment. And so I think we are very benefiting from that aspect.
Thank you, Matt. The next question please.
Thank you. Our next question is coming from a Joe Giamichael of Rodman & Renshaw.
Joe Giamichael – Rodman & Renshaw
Good morning, Najeeb.
Joe Giamichael – Rodman & Renshaw
I know it’s been a particularly difficult time for you. I only have a couple of questions. I apologize if I asked something you’ve covered. The clarity of the call has kind of cut in and out on me. So first, if you back out the gain from foreign exchange and then back out the minority interest, the net for the quarter on an operating basis would have been negative. Where are you seeing the degradation in the operating model now?
That’s a very good question, and I think I’ll let Tina can be more specific, and then we can ask some more questions and add color to this.
Yes. I was anticipating this question. And we’ve looked at what it would be if we backed out the gain, and our net income would be about $600,000. In the past to adjust the minority interest and adjustment as well because all of that gain was from the Pakistan subsidiary. And that would then, of course, adjust the minority interest down. And the net loss after minority interest, where there’s only been about $116,000. So it did have some effect, but not a huge effect on when you look at all of the factors involved in it.
Tina, if you allow me, I just had one thing here, Joe. You see, you look at our operational costs, which have gone up as a result of the dollar depreciation. Most of this is coming from Pakistan. I would say 95% of this currency gain is coming from Pakistan. And so, what’s happening is as a result of dollar being more expensive in Pakistan, the cost of fuel and all those inflationary factors have added to our costs in Pakistan. So really our operational costs have gone up as a result of dollar being more expensive. So now we’re getting a benefit from the dollar being more expensive because our revenues and receivables are in dollars. So essentially, this is adding to profitability. And it’s a good thing that the dollar is strong because it is more than making up for additional salaries and costs we are paying because of the dollar being more expensive, if you know the logic of what I’m saying.
Joe Giamichael-Rodman & Renshaw
Sure. I guess, so outside of the business that’s being run to the Pakistani subsidiary, is it just that you’re seeing cost inflation and not a revenue pickup to offset that?
Yes, because our UK operation, for example, in fact, had a currency loss because the Sterling had gone down against our dollar, as opposed to the Rupee in a much bigger way. So we are seeing a much bigger impact in the UK because we calculate everything as Sterling, where as we calculate for reporting everything in dollars, so Pakistan being the bigger entity. So if you follow the logic that’ saying the costs have gone up because of the dollar being more expensive, but because we sign our contracts in dollars and our revenue’s coming in dollars, so we are benefiting. So it’s a double-edged sword, in a way. I think it’s a good thing we have the dollar gain. And the fact that we sign everything in dollars and Euros, it benefits the Pakistan operation whether Rupee has depreciated.
Joe Giamichael-Rodman & Renshaw
Okay. And just to change subjects here. Just to clarify, the guidance does not include – the ’09 guidance does not include the contribution from Ciena. Can you just remind us what the revenue run rate and operating profit had been in a 12-trial month basis for Ciena?
Mitch, you want to jump in? You have the numbers? Hello, Mitch?
Mitch Van Wye
Actually, I have to defer to Tina. I am not in front of that information, I apologize.
I know, I know the numbers, Najeeb.
Go ahead, please.
I’ll go and jump in here. We’ve seen it did about $3.5 million in revenues. And they had about $800,000 in profits for the previous 12 months. So not everything is integrated in the company, we hopefully will improve on this. So we see this to be an accretive acquisition from an EPS point of view with a number of shares we’re going issue through the enhanced income. We believe it will be accretive and there should be no dilution.
Also further, Joe, I want to elaborate on how we factor in their contribution. It’s about two weeks’ old acquisition, and the team is working diligently. An asset of the new deals are realized, then we will either come back and see how it is either affecting, of course, in a positive way both or top and bottom line. And we’ll let the market know then.
Joe Giamichael-Rodman & Renshaw
Okay. Got it. Thank you very much.
Thank you, Joe. Appreciate it. Next question please?
(Operator instructions) We have a follow-up question coming from Matthew Weiss of Maxim Group.
Matthew Weiss – Maxim Group
Hi. Just another one on the gross margin front, you guys are obviously targeting high 50% to 60%, you came in closer to 50% this quarter. Would that suggest you guys are expecting a steady improvement throughout the course of the year? And then, maybe if you could talk about the pricing environment a little bit, if that’s having any type of impact?
I believe there are two factors. One is, of course, we are using some of those UK, US based sources, just to be much more prudent with our venturing concept so that the customers are much more comfortable who are based in the North America and the UK. Although, I intend to see reduction, as you saw my earlier comments, we want to make sure that we will leverage the best cost possible. Secondly, there’s a – definitely trend of rising costs anyway. It’s a worldwide thing you know. It is also early on – of course the gas prices have come down, but there’s the inflationary effect, particularly in our development in the Pakistan, which is as of now 60% to 70% development happening over there. But we’ll make every effort, Matthew, to make sure that we watch everything that can help improve our margins back to where it should be, in the range of 58% to 60%.
Matthew Weiss – Maxim Group
Okay. And then, have you seen anything unique on – for the cash collection payment term front? Your DSO’s rough, more than I’ve seen of late. Was there any impact there or are you seeing anything – ?
Actually, this quarter was quite good. We were hoping and knew exactly what we expected. I mean we have seen good collections in Q1 spiked in Asia because most of the customers are based there and even in the US. There’s always going to be good news every once in a while. So all the customers or most of them are – mostly, they’re blue chip or a sizable company. Sometimes there are delays, but overall, relatively improving in our cash flow position and dividend collections.
Matthew Weiss – Maxim Group
Okay. Thank you.
Thank you, Matt.
Thank you. There are no further questions at this time. I’d like to hand the floor back over to Najeeb.
Thank you, operator. Thank you everyone for joining us today. We look forward to talking to you again next quarter to provide an update on our progress. Thank you, and have a great day.
This concludes today’s teleconference. You may disconnect your lines at this time, and thank you for your participation.
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