Interview with Ness Technologies CEO Sachi Gerlitz

Aug.25.08 | About: Ness Technologies, (NSTC)

On August 25, The Wall Street Transcript interviewed Sachi Gerlitz, President and CEO of Ness Technologies (NASDAQ:NSTC). Key excerpts follow:

 

TWST: May we start with a short history and overview of the portfolio solutions that you offer?

Mr. Gerlitz: Ness Technologies is a U.S.-based international company active in 18 different countries.

Originally we were founded in Israel and became the IT services giant of the Israeli market. Today, we have less than 35% of our revenue coming from Israel. We are a global provider of IT services and we specialize in three types of services: system integration, software development services, and packaged software distribution services. We provide these main three lines of services predominantly in three geographical areas: the United States, Central and Eastern Europe, and Israel. As I said before, we are very active in 18 different markets.

TWST: I understand the company went through a significant management change in 2006. What has been your focus since then? What have been your priorities?

Mr. Gerlitz: Previous management stepped down in the beginning of 2007 and I came on board by the end of the first quarter of 2007, and brought with me some new members of the management team. Our focus from then until today is in two directions; first is to streamline the operation of the company and make the company more predictive and more transparent to the Street. I am very happy to say that our focus on some of these parameters like cash generation did bear good fruit and we are enjoying very steady and well-predicted positive operational cash flow in the last few quarters. This was also the fourth consecutive quarter where we met or exceeded our guidance to the Street. So this was one direction that was very important to, I would say, improve the performance of the company.

The second direction, from a more strategic point of view, and the main change I and the team brought into the company, is the focus on synergies across our global market. We are active in 18 different countries and our focus is to bring solutions, competence and know-how from one country to the others and enjoy and leverage our global reach for the benefit of our customers and therefore to the benefit of our shareholders.

TWST: What challenges are you currently facing with the current macroeconomic situation both in the United States and the emerging slowdown in Europe?

Mr. Gerlitz: What we experience from the economic macro point of view is a couple of phenomena. First is the challenge that a weak dollar creates on a company like ours that is measured on dollars, while our expenses are in other currencies - and most of them are stronger than the dollar. So we have an exposure to the Israeli Shekel and to the Indian Rupee as well as to the Czech Crown and to the Slovak Crown that hurt our operating margins, since our expenses are denominated in one currency and our revenues are denominated in a different currency. So this is one difficulty that we are facing where our margins are eroding and we need to address it operationally as well as financially.

In terms of a slowdown of the economy, we face it mainly in the United States but we believe that our offering is both offensive and defensive. In other words, as most of our offering in the United States is based on offerings either from India or from Eastern Europe, the slowdown of the economy actually creates a situation by which our customers are looking for, so to speak, extending the value of the dollar. And, by the arbitrage between a US-based software development and offshore based software development that we offer, we are getting more traction from large customers that are trying to benefit from their budget - whether this is the IT budget or the R&D budget.

TWST: Could you elaborate on how you intend to control your costs both operationally and financially as you mentioned previously?

Mr. Gerlitz: Operational cost is something that a company needs to monitor very closely especially with the downturn of the economy. We've been trimming down our expenses for the last few quarters in order to adapt ourselves to the new environment that I described, of the weak dollar and, for instance, the strong Shekel and strong Rupee.

One of the things that we did is what we call bettering our revenues and that is a conscious exit from types of businesses where the fundamental operating margin is lower than our target, and giving up top line in order to improve our operating margin. Also, we have reduced considerably our bench. A bench in the IT services business enables more flexibility to address demand, but on the other hand it creates a drag on the earnings so we've reduced our bench dramatically - mostly in India.

From a financial point of view, we tried to hedge the dollar against the rupee which was partially successful, mostly when the Rupee got stronger, but recently the Rupee became weaker again and got back to over a 40 level, and then the hedging became less effective for us.

TWST: Would you give us the scenario for the next 12 to 24 months?

Mr. Gerlitz: I believe that Ness will focus in the next 12 to 24 months on extending its business in two major areas. One is providing software development services to Western Europe- and United States-based corporations from our near-shore and offshore centers. I believe that the shortage that the Western world has for skilled software engineers could be addressed only (both financially, but also from a quality point of view) by going to markets that can provide the supply of these human skills - and that is Eastern Europe and India. Ness will focus on providing these services and increase the share of those services in our overall revenue and earnings.

Second, we will focus highly on penetrating more the Eastern European region. We believe that in the next 24 months the economy will continue to grow over there, and this growth of GDP will increase also the IT spending. We believe that this is a very good area for us to grow the company.