Greetings from Pakistan: NetSol Delivers Solid Gains for US Investors

My biggest percentage gainer of the year is from…Pakistan? Hard to believe, but NetSol (NTWK), a Pakistani business process outsourcing and lease management software company, is up 90% from where I bought it less than two months ago!

The rise wasn’t entirely unexpected. The shares were dirt cheap, and the company had a strong cash position and its financial results showed signs of improvement.

NetSol’s first quarter report confirms that the company has turned the corner. Revenues increased 19% year-over-year to $9.1 million, driven by improvement in all three of NetSol’s business lines (service, licensing, and maintenance). Gross margin rose from 48% to 56%. For the quarter, NetSol earned $2.3M, or $.09 per diluted share, on a GAAP basis, and $3.2M, or $.13 per diluted share, on an EBITDA basis. Both measures were dramatic improvements over the prior year results.

Just as importantly, NetSol reiterated guidance for fiscal year 2008 of 25-30% growth in annual revenues, and diluted EPS of $.28-$.32.

Chairman and CEO Najeeb Ghauri stated:

Our third quarter results provide an excellent start to the second half of fiscal 2008, which is historically NetSol’s stronger half-year period. With double-digit year-over-year growth in services, licenses, and maintenance fees translating into a significant rise in profitability, we remain on track to achieve our full year top and bottom line financial objectives…. Additionally, during the quarter we made key strategic investments in our North American operations to strengthen and expand our presence in the region, a critical market for NetSol’s future growth…. As a global enterprise, it is NetSol’s goal to progress with our operational objectives for each division while sustaining profitability and delivering excellent financial results. NetSol’s double-digit revenue growth and strong net income performance reflect broad-based success towards our objectives of improving margins, effectively leveraging our worldwide infrastructure, and improving operating efficiencies while expanding each of our division’s revenue streams.

It should be noted that NetSol is no longer the dirt cheap stock it once was. If NTWK hits the midpoint of its 2008 guidance, then its current price represents approximately a 10x multiple on GAAP earnings. That is still far below market, but hardly the 5.6x multiple of a few months ago.

DISCLOSURE: Long NTWK.

Comments

[mindthegap_ca:]

The projected price target for this stock is $6 and it will still be cheap given the growth rate. This company is clearly not understood by big investor but it will not be long after all these publications.

2008 May 14 12:43 PM

[mindthegap_ca:]

The projected price target for this stock is $6 and it will still be cheap given the growth rate. This company is clearly not understood by big investor but it will not be long after all these publications.

2008 May 14 12:47 PM

[Goblin:]

It still is. Soon the company will have revenues of 70-80 mill.

2008 May 14 01:05 PM