Time to Take Another Look at NetSol ?

Pakistani software company NetSol (NTWK) is beginning to look interesting. Last May, I took modest profits on a long position in Netsol after the company announced disappointing results.

But NetSol’s second quarter 2008 earnings, announced in February, were back on track. Revenues increased 16% year-over-year to $8.4 million, gross margin increased year-over-year from 50% to 57%, operating income rose 284% year-over-year to $1.4M million from $377,000. For fiscal 2008, Netsol expects annual revenue growth between 25% and 30%, and diluted earnings per share of $0.28-$0.32.

At Tuesday’s close of $1.66, achieving the midpoint of this EPS range would give NetSol a 2008 P/E of 5.53. That figure may even understate results on an enterprise value basis, as the company has over $8.5M in cash and equivalents and less than $0.6M in long-term debt.

Commenting on last quarter’s results, Chairman and CEO Ghauri said:

NetSol continued to make excellent progress across its key financial and operational objectives during the fiscal second quarter of 2008. Our double digit top line growth was driven by strong demand for our IT service offerings and solid gains in license and maintenance revenue streams. The combined revenue growth provided a strong foundation for NetSol to post impressive gains in GAAP net income and EBITDA profitability for the quarter, as compared to losses in the year ago period. NetSol’s bottom line profitability also benefited from the significant progress we continue to make in terms of improving operating efficiencies and managing costs. . . . . Overall, I am pleased with the progress we made in the first half of fiscal 2008 and I stand optimistic on growth prospects for fiscal 2008 as the second half of our fiscal year is historically stronger than the first half.

Our results during the fiscal second quarter were even more impressive when taking into account there were seven fewer billing days during the quarter for our largest business unit compared to the sequential first quarter of 2008, largely due to holidays, as well as the extraordinary events in Pakistan during the quarter.

NetSol has also made some important strides this quarter. In January, it landed a new customer for its flagship lease management software with a contract valued at $1.5M. Last month, Netsol announced a Basel II consulting contract with a leading Pakistani bank. The value of the latter contract was not disclosed, but it sounds substantial. Finally, a few weeks ago, Netsol authorized a one million share buyback.

NTWK’s chart remains a disaster by any measure. I would normally wait for the downtrend to be broken before buying. However, due to the paltry valuation and positive news flow, I took an initial position on Monday at $1.58.

Disclosure: Long NTWK.

Comments

[asim:]

i think it would be more appropriate if netsol would consider giving a dividend instead of buying back shares, if they hve any surplus funds. or else they should retire debt.

2008 Apr 02 07:04 AM

[investorslive:]

NTWK beautiful chart - breakout mode

www.investorslive.com/.../

2008 May 04 11:52 PM