NetSol Technologies' (NTWK) CEO Najeeb Ghauri on Q3 2014 Results - Earnings Call Transcript

May.13.14 | About: NetSol Technologies (NTWK)

NetSol Technologies Inc. (NASDAQ:NTWK)

Q3 2014 Earnings Conference Call

May 13, 2014 5:00 PM ET

Executives

Patti McGlasson – SVP, Legal and Corporate Affairs, General Counsel and Corporate Secretary

Najeeb Ghauri – Founder, Chairman and CEO

Roger Almond – CFO

Analysts

Matthew Paul – Sidoti & Company, LLC

Howard Halpern – Taglich Brothers, Inc.

Operator

Good day ladies and gentlemen thank you for standing by. Welcome to the NetSol Technologies Fiscal 2014 Third Quarter Results Conference Call. During today’s presentation, all parties will be in a listen-only mode, following the presentation the conference will be opened for questions. (Operator Instructions).

This conference is being recorded today, Tuesday, May 13th of 2014 and now I would like to turn the conference over to Patti McGlasson Senior Vice President, Legal and Corporate Affairs, General Counsel and Corporate Secretary for NetSol Technologies. Please go ahead.

Patti McGlasson

Thank you. Good afternoon everyone and thank you for joining us today to discuss NetSol Technologies Fiscal 2014 third quarter results. Before we begin, I would like to remind you that today’s call may include forward-looking statements that are subject to certain risks and uncertainties.

Please refer to the Safe Harbor statement contained in today’s press release and also the NetSol’s periodic filings with the SEC for a complete discussion of those risk and uncertainties that could cause actual results to differ materially from those you might pursue today. I would also like to point out that NetSol may also discuss Non-GAAP measures. The release issued earlier today contains a reconciliation of these Non-GAAP financial results to the most comparable GAAP measures.

Following a review of the Company’s business highlights, financial results and discussions of the Company’s strategy, we will open the call up for questions. Today’s call is being webcast at www.net.tech.com. Following the conclusion of the call, the webcast may be accessed on the NetSol website, where it will be archived for 90 days. Joining me today on today’s call is Najeeb Ghauri, CEO and Chairman in NetSol Technologies and Roger K Almond CFO and the call is scheduled for one hour.

With that said, I will now turn the call over to Najeeb. Najeeb?

Najeeb Ghauri

Thank you Patti and thank you to everyone joining us today. Today’s results reflect the continued transition to our next generation leasing and finance solution, NFS Ascent, which officially launched in the second quarter of 2014. Roger Almond, our CFO will provide our financial results momentarily.

The introduction of our new solution is progressing very well with increased project size and scope. We are in the middle of transforming NetSol from a legacy system to a newer technology platform, as we believe would be another flagship solution in the industry. As it a large multi-million dollar implementation, it takes time for both parties to conduct the necessary due diligence and we want to certain that, we demonstrated the full value of our products and services. This in turn increases the length of the sales cycle and our near-term results.

That said, NFS Ascent is being very well positioned and very well received and we have strong visibility into our pipeline. Both we and our prospects believe that NetSol has a most robust leasing and financing solutions available providing customers with a highly flexible and scalable solutions that includes mobility features, a stocks complying audit trial, third-party integration among many other key features. We have invested heavily into this new platform and are beginning to ramp up dramatically with new staff hiring with that once new dealer sign, we are able to continue a sustainable growth trajectory.

Today, we are working on deals many of which I have described previously to you that have ability to transform our Company. It is not a matter of if we sign these new deals but it’s a matter of when we will wrap it up our discussions with the customers. This gives me an entire team the confidence we need to continue to further invest in people and in infrastructure. That confidence is supported by the market opportunities for our core solutions, such as with multiple multi-county implementations with world leasing auto and finance companies.

NetSol has a history and working relationships to further penetrate in key markets just with the relationships we have today to say nothing about our new relationships. For the many companies on legacy self-developed system, we can demonstrate how our platform provides them with opportunity to improve efficiencies and allow for new ways to conduct business including mobility and for smaller companies, our next generation platform provides a modular approach allowing them to integrate components as they continue to grow.

The opportunity before us is large and growing and capturing in servicing this opportunity is our primary focus. This is why we decided to diverse from Vroozi a cloud-based procurement platform so that we can remain focus on our core business.

Further, we are already to move quickly rich in parts, means the ability to service and support new and larger projects simultaneously, we are continuing to invest in our organization, hiring more than 50 software engineers in the quarter. These engineers are going through robust training at the NetSol Technologies campus to make sure that we do not sacrifice quality of service that has earned the trust and respect of our customers. This investment enhances our ability to provide sustainable long-term growth and we believe will enable us to maintain our leadership position as a leading solution provider to the leasing and finance industry throughout the world.

With that, I’d now turn the call over to our CFO, Roger Almond to review the Company’s results for the third quarter. Roger?

Roger Almond

Thank you, Najeeb. As Najeeb just mentioned, our top-line continued to be impacted by lower license revenue as a result of the transition to our next generation solution and on the bottom-line with additional expenses related to continued hiring of new employees.

Total net revenue for the third quarter of fiscal 2014 was $9.4 million, which is comprised of $2.1 million in license revenue, which consist primarily of contracts related to NFS, our first generation solution, $2.6 million in maintenance revenue and $4.7 million in service revenue. Maintenance revenue was down sequentially from the second quarter of fiscal 2014 by approximately $311,000 and for the nine months ended March 31, 2014 our maintenance revenue has increased 8.39% or $604,000 compared to the nine months ended March 31, 2013.

Service revenue decreased approximately $542,000 from the second quarter of 2014, but has increased approximately 400,000 when compared to the first quarter of 2014. Overall, service revenue was down compared to the previous year due to lack of service revenue associated with new license deals.

Cost of sales for the fiscal third quarter were $7 million, up from $5.7million for the same period last year. The increase is related to two factors: First, our salaries have increased to the hiring of 52 technical employees during the quarter and 278 employees during the fiscal year. And second, the increase in depreciation and amortization as we have begun amortizing the NFS Ascent development cost now that the software has been launched.

Total operating expenses for the 2014 fiscal third quarter were $5.1 million, up from $3.8 million last year. This increase was due to higher selling and marketing expenses and general and administrative expenses. Operating loss for the third quarter was $2.7 million, compared with operating income of $3.1 million last year. Net loss was $1.3 million, equal to $0.14 compared net income of 1.6 million or $0.19 per diluted share.

As Najeeb previously mentioned, during the quarter ended March 31, 2014 we completed to sale of Vroozi for $2.7 million and recognize a $1.5 million gain on sale in the quarter. The weighted average number share outstanding was 9.1 million shares for the fiscal third quarter. Our cash and cash equivalence balance grew to $12.4 million from $7.9 million at June 30, 2013.

Accounts receivables were 13 million at March 31, 2014 compared with $14.7 million at June 30, 2013. Our revenue and excessive billings were $4.5 million at March 31, 2014 compared to $15.4 million at June 30, 2013. During the nine months, we made purchases of property and equipment of $9.6 million related to the investment in our delivery centers and our IT infrastructure. We anticipate that, our capital expenditures for the next 12 months to be up to be between $2.5 million and $3.5 million as we continue to position ourselves for long-term growth.

With that, I would like to now turn the call back over to Najeeb. Najeeb?

Najeeb Ghauri

Thank you, Roger. Today, we are making a crucial investment for the long-term growth of our Company investing in greater resources to capture market share for our platform which fulfill a unique need among new and existing customers, increasing our customers efficiency through real time data analysis and facilitating the decision making processes. Across the globe, our team has worked hard in NFS Ascent launch activities. Confidence into all of our team runs right high and we are very excited about the prospect ahead.

Ultimately, our strategy will be validated by results and if anything I would hope that near-term highly indicates where we believe the business is headed. Our success for years with NFS products tend for one key sector that is we work in the best interest of our client and partners. We provide what works with them and create solid ROI for every of our client. This is a single reason for our long-term loyalty and growing confidence in NetSol from our customers. In a nutshell, we exist today because of our clients and partnership.

I’d like to express deep gratitude to our shareholders for their continued support as we navigate this transition period many of you have stuck with us through and we greatly appreciate your partnership.

With that, we would now like to open the call for question-and-answer. Operator?

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions). Our first question is from the line of Matthew Paul with Sidoti & Company. Please go ahead.

Matthew Paul – Sidoti & Company, LLC

Hi, guys. Good afternoon. Thanks for taking my questions. In regards to the improved cash collections in the quarter and on the year, is there any change in payment terms for your customer here?

Najeeb Ghauri

Yeah, Matt. Thank you. We actually have been quite well, as you said it right. Our customers appreciate us with a fact that we are obviously always give on time delivery and limitations on all those pipeline projects and they want to make sure that we are getting our money on time. So, it’s simply a bit more contact with our customer through our pre-sales team to make sure that we get our bills must be paid on time. So, pretty much more streamlined and more connective with our customer in getting the payments.

Matthew Paul – Sidoti & Company, LLC

Okay. Moving forward, the maintenance and service piece of your business was down about 8% sequentially. I think my calculation is correct, and in the preparing remarks you highlighted the changes year-over-year and how the nine months of this year has increased from the nine months of last year, but is this sequential decrease because of lack of license deals signed in the first three quarters?

Najeeb Ghauri

Yes. That is pretty much it. As you know, we kind of seas the aggressive activity for the R1, we didn’t stop I it, but we now focus on NFS Ascent for last six or nine months now. What you will see in the coming quarters, of course, when we are fully stabilized with some negotiation planning of new agreements with NFS Ascent, this will come back on track because naturally in one way, we have shown increase in our maintenance income in last two years from the previous year’s that’s because we have improved our pricing and added more licenses in last two years.

But now that we are in a transition and a kind of slow period for the new license sales, I believe as we sign the new agreements, they will follow with additional or incremental maintenance income. But, I think on our balance, our income has actually increased from existing customer on maintenance services.

Matthew Paul – Sidoti & Company, LLC

Okay. And sorry if I missed this, is it fair to you ask if you have any expectation to sign and accumulate license sales in the fourth quarter?

Najeeb Ghauri

I cannot say that right now. All I can say is, the pipeline is quite I think impressive. We get a lot of attraction for both of course NFS Ascent. See, what is really important to understand Matt is that, our move to the next generation NFS Ascent is a taking a lot more time for the due diligence between the customer as well as the Company and it’s much more complex multi-country multi-level and involve the bigger size customer, bigger volume because they want to look at the system for multiple location. In the past, if you want a deal or two deal for one customer with the old solution.

So now the trend is changed because they want to spend a more time in looking product and we want to make sure that we are able to support those complex application installations and serve big customers.

So I believe that, the sales cycle has grown a little longer than it used in the past. But as you mature, as the product get mature and get more traction, you will see much improved results from the coming quarters. I can’t say much about the Q4, because we don’t give any guidance for the year.

Matthew Paul – Sidoti & Company, LLC

Great. It’s good hear to the optimism moving forward. In regard to your operating expenses, could you provide a little color on what a normalized rate will be moving forward? Is it going to be close to what we saw this quarter?

Najeeb Ghauri

Yeah. Let me have Roger jump in.

Roger Almond

I think as you go forward on the operating expenses, you see a lot of increase mainly in the sales and marketing and as we hire additional marketing or sales staff and then we are getting around the country, marketing the product to see that probably kind of start normalizing. What we also talked about was the depreciation and amortization expenses, you will see that pick up about $1 million a year, as we start amortizing of the product, R&D expenses that we can capitalize over the years as we produced NFS Ascent, you’ll see that start to coming through at a $1 million a year. So, I think this quarter ramped up that hopefully you will start to see that kind of normalized over the remaining quarters.

Matthew Paul – Sidoti & Company, LLC

Alright, guys. Thanks for taking my questions. Talk to you soon.

Najeeb Ghauri

Thank you, Matt.

Operator

(Operator Instructions). Our next question comes from the line of Howard Halpern with Taglich Brothers. Please go ahead.

Howard Halpern – Taglich Brothers, Inc.

Good afternoon, guys.

Najeeb Ghauri

Hi, Howard.

Howard Halpern – Taglich Brothers, Inc.

I guess sort of following-on to the last question there. In the quest of revenues side, is it going to be there depreciation and amortization that going forward should be the biggest variable and driver of that expense?

Najeeb Ghauri

Yes. I think Roger will be the best to answer that.

Roger Almond

Yeah. Howard, just to make sure I understand your question correctly, so you are asking regarding the cost of sales?

Howard Halpern – Taglich Brothers, Inc.

Right.

Roger Almond

You are seeing the variable going forward would be the...

Howard Halpern – Taglich Brothers, Inc.

The D&A with salaries and consultants are pretty much – you are at a level where that should remain sort of consistent?

Roger Almond

Well, then I would think going forward that, our amortization as we hit, now that we’ve started amortizing the product cost associated with NFS Ascent that, going forward you would see about a $1 million dollars a years. So, I wouldn’t consider a variable that goes up and down because we pretty much have that being amortized now. And so, you could anticipate during 2015 probably $1 million dollars more of extents going through cost of sales through amortization than what was there during 2014.

Howard Halpern – Taglich Brothers, Inc.

Okay. And another one question, you discontinued Vroozi operations, I did the calculation and the difference between the nine months and what we have for the first two quarters is perhaps been like $290,000. Of course, I don’t know that you’re going to put out any kind of restatement yet, is it safe to assume that number could be split going backward reducing the services by that amount to split that in a half to 90?

Najeeb Ghauri

Roger, do you have the answer?

Roger Almond

Howard, I am not sure I follow your question. Could you repeat it?

Howard Halpern – Taglich Brothers, Inc.

Yeah. If you add up what was previously reported on the services side, those three quarters, it doesn’t add to for the nine months which is the Vroozi discontinued operation I’m assuming. And that comes like $290,000, so I my own rough restatement if I just split that $290,000 between the first two quarters, that should be approximation of most when you do the 10-K actually?

Roger Almond

Right. Because what we’ve done as we – GAAP requires us to pull out any revenues and expenses associated with Vroozi because it’s discontinued and pull that down into the line item discontinued operation. And so, the numbers for the three and nine months for both period for 2014 and 2013, those numbers, the sales numbers should be in stripped out as the revenues and your expenses have been stripped out and everything is just netted down in your income for discontinued operation.

Howard Halpern – Taglich Brothers, Inc.

Okay. I will do that rough estimate for that.

Roger Almond

Yeah. That’s a GAAP requirement, now where they have is pull that down and put it into one line item there.

Howard Halpern – Taglich Brothers, Inc.

Yes. Off the license fees, what percentage was Ascent or was it all still most of overall legacy products?

Roger Almond

$2.1 million that we had, $1.3 million of it is related to NFS, I am sorry, not NFS Ascent, but our own product R1 and then we had some coming through SG&A through our lease pack and then some coming from NPE through our lease stock. So that’s kind of how was broken down.

Howard Halpern – Taglich Brothers, Inc.

Okay. And in terms of the pipeline, if you could may be give a little color into what percentage you are seeing in those three regions U.S. Europe and Asia and again specially skewed to the U.S. that pipeline for you track, the percentage of revenues that you would wanted to achieve in our prior calls?

Najeeb Ghauri

Yeah, absolutely. Howard, what is interesting is in last few months, since actually we announce for the launch of NFS Ascent a few months ago, we’ve seen much more traction in the North American market than we use to see prior to the announcement, maybe there are 10 different deals on the table right now that we are working through, different stages, different levels and mostly NFS Ascent.

As Roger said that, we are looking for a bigger growth in the U.S. markets in coming months or coming years. But the Asia Pacific market is actually even stronger. We are looking at some customers in Thailand and China, some in Japan and other parts of Asia Pacific markets very robust activities.

We also have seen good response from the European customers. I have no liberty of sharing any name because we’ve not made any final agreements yet. But, overall, across the globe we’ve seen a good response from all our customers, existing and the new prospects. Now what it means is that, we made the timely decision when we announced the launch and yes we’ve taken a little hit on the revenue as expected, but I believe the pipeline is encouraging and our teams are extremely busy across the globe in meeting with the customers and demos and what’s on and what not. So, I think as I said in my prepared remarks, we are really excited about it and the end future and how this will shape our Company and the industry as a whole.

Howard Halpern – Taglich Brothers, Inc.

And one last one, is there anything the new going on in the Middle East region?

Najeeb Ghauri

Sorry. I missed the first part.

Howard Halpern – Taglich Brothers, Inc.

Is there anything, do you have any new contracts or prospects in the Middle East?

Najeeb Ghauri

Actually we are so focused in our emerging markets especially for our core business. So, I’d like to do downsize our activities in the Middle East simply because our markets are so full of activities in Asia and Europe and the U.S. We can do much better service to make sure that we stay focus on our core business and the partnership is still there, but I think we will continue to really focus on our core business and we believe that we need more people and more infrastructure to map out opportunity that we have and that’s why we had to do divest Vroozi few months ago. So, I think we’re really focused and excited about the opportunity we have.

Howard Halpern – Taglich Brothers, Inc.

Okay. And I’ll keep moving forward and hopefully 2015 will be bang year coming up.

Najeeb Ghauri

Yes. We should hope so.

Howard Halpern – Taglich Brothers, Inc.

Okay. Thanks.

Najeeb Ghauri

Thank you, Howard.

Operator

(Operator Instructions). I am showing no further questions in the queue. I would like to turn the conference back to management for any closing remarks at this time.

Najeeb Ghauri

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

Operator

Thank you. Ladies and gentlemen this concludes the NetSol Technologies fiscal 2014 third quarter results conference call. We thank you for your participation. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!