NetSol Technologies, Inc.: Is There Fire Behind That Smoke?

| About: NetSol Technologies (NTWK)

NetSol Technologies, Inc. (NASDAQ:NTWK) has been under significant pressure since the recent release of a negative article on this web site. In light of my previous review on the company, I wanted to respond with some brief thoughts on the company and the stock.

By way of background, I wrote most of my article on the company the night before fiscal fourth quarter earnings were released on September 12, 2013. NTWK investors typically get a preview of quarterly earnings when NTWK's 65.2%-owned subsidiary, NetSol PK releases earnings, which happened on September 9, 2013. After analyzing these numbers, I estimated NTWK would report EPS of at least $0.31 for the quarter vs. a $0.22 consensus estimate. (Source: Yahoo Finance) After seeing NTWK's earnings release on the morning of September 12, 2013, which showed EPS of $0.35 and cash flow from operations of $13.8 million for the full fiscal year, I put the finishing touches on my article and submitted it for publication.

From a high level, I do think NTWK is well positioned with its core product, NetSol Financial Suite (NFS). This asset finance software program provides the company with a global footprint among the captive automotive manufacturers, and the firm is especially strong in Asia Pacific, and China in particular. One of NTWK's competitive advantages is that a large percentage of its IT professionals work in Lahore, Pakistan. Pakistan continues to provide NTWK with a strong flow of well-educated IT professionals at affordable, relative prices versus places like India. Deals sizes are getting larger, and the secular growth story in Asia Pacific makes sense.

I have followed NTWK for a number of years. At a former job with a hedge fund, I had access to the management team and interviewed clients of the firm about their experience with NTWK. As an individual investor, I no longer have access to the management team. I wasn't permitted to ask questions on the most recent earnings call, and the firm hasn't returned either of my two phone calls to them in recent weeks. NTWK directs investors to their web site and to information they post on

The most recent written attack on the company included some sensational commentary, which NTWK refuted in a press release issued on October 3, 2013. However, the author did discuss some issues which likely have kept institutional investors on the sidelines well before he highlighted them. By NTWK's own admission, "Beginning with our 10-K for the year ending June 30, 2011, our management concluded that our core accounting staff does not have sufficient U.S GAAP experience and training. This lack of sufficient U.S. GAAP expertise in the core accounting staff led to the management's determination that this is a material weakness in our internal controls over financial reporting and, accordingly, in our disclosure controls and procedures." (Source: Fiscal 2013 10-K). The recent appointment of Roger Almond as the company's CFO makes him the sixth individual to have that title going back the past twelve years.

The firm's choice of auditors makes great sense from a location perspective. Kabani & Company, Inc. has offices in Los Angeles, CA, near NTWK's headquarters, and also offices in Lahore, Pakistan, in close proximity to NTWK's Pakistan campus. Kabani & Company have provided accounting and audit services for NTWK for more than 11 years. However, it does appear that the majority of Kabani & Company's publicly traded clients are OTCQB companies, formerly known as OTC Bulletin Board stocks. NTWK's audit fees paid to Kabani & Company have doubled from $120,000 in fiscal 2009 to $240,000 in the most recent fiscal year. (Source: SEC Filings) This number still seems small to me relative to a company with over $50 million in annual revenue across multiple continents with eight office locations.

In summary, I acknowledge that many investors, myself included, see some "smoke" in the NTWK theater. Someone yelled "Fire!", and there has been a rather quick rush to the exits. If the company is able to execute on its opportunity set and regain investor confidence regarding financial reporting and execution issues, today's stock price could provide a very attractive entry as I look ahead a few quarters. I have a modest long position in the stock, and it definitely should be categorized as speculative in nature.

(Click to enlarge)

Disclosure: I am long NTWK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.