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| NTWK > SEC Filings for NTWK > Form 10-Q on 13-May-2009 | All Recent SEC Filings |
13-May-2009
Quarterly Report
Forward-Looking Information.
This report contains certain forward-looking statements and information relating to the Company that is based on the beliefs of its management as well as assumptions made by and information currently available to its management. When used in this report, the words "anticipate", "believe", "estimate", "expect", "intend", "plan", and similar expressions as they relate to the Company or its management, are intended to identify forward-looking statements. These statements reflect management's current view of the Company with respect to future events and are subject to certain risks, uncertainties and assumptions. Should any of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described in this report as anticipated, estimated or expected. The Company's realization of its business aims could be materially and adversely affected by any technical or other problems in, or difficulties with, planned funding and technologies, third party technologies which render the Company's technologies obsolete, the unavailability of required third party technology licenses on commercially reasonable terms, the loss of key research and development personnel, the inability or failure to recruit and retain qualified research and development personnel, or the adoption of technology standards which are different from technologies around which the Company's business ultimately is built. The Company does not intend to update these forward-looking statements.
INTRODUCTION
NetSol Technologies, Inc. ("NetSol" or the "Company") (NasdaqCM: NTWK) (DIFX:
NTWK) is a US worldwide provider of global business services and enterprise
application solutions. NetSol uses its BestShoring™ practices and
highly-experienced resources in analysis, development, quality assurance, and
implementation to deliver high-quality, cost-effective solutions. Organized into
specialized practices, these product and services offerings include portfolio
management systems for the financial services industry, consulting, custom
development, systems integration, and technical services for the global
Healthcare, Insurance, Real Estate, and Technology markets. NetSol's commitment
to quality is demonstrated by its achievement of the ISO 9001, ISO 279001, and
SEI (Software Engineering Institute, Carnegie Mellon University, USA) CMMi
(Capability Maturity Model) Level 5 assessments, a distinction shared by fewer
than 100 companies worldwide. NetSol offers SAP and Business Objects consulting
and implementation services and is a Certified SAP Business Objects Partner.
NetSol Technologies' clients include Fortune 500 manufacturers, global
automakers, financial institutions, technology providers, and governmental
agencies. Founded in 1996, NetSol is headquartered in Emeryville, California
with a small corporate office in Calabasas, California; Horsham, United Kingdom;
Sydney, Australia; Beijing, China; Lahore, Islamabad, and Karachi, Pakistan;
and, Bangkok, Thailand.
In today's highly competitive marketplace, business executives with labor or services-centric budgetary responsibilities are not just encouraged but are, in fact, obliged to engage in "Make or Buy" decision process when contemplating how to support and staff new development, testing, services support and delivery activities. The Company has initiated the strategic evolution of its business offerings through a BestShoring™ solutions strategy. BestShoring ™ is simply defined as NetSol Technologies' ability to draw upon its global resource base and construct the best possible solution and price for each and every customer. Unlike traditional outsourcing offshore vendors, NetSol draws upon an international workforce and delivery capability to ensure a "BestShoring™ delivers BestSolution™" approach.
NetSol combines domain expertise, not only with lowest cost blended rates from its design centers and campuses located around the world, but also with the guarantee of localized program and project management while minimizing any implementation risk associated with a single service center. Our BestShoring™ approach, which we consider a unique and cost effective global development model, is leading the way into the 21st century, providing value-added Solutions for Global Business Services through a win-win partnership, rather than the traditional outsourced vendor framework. Our focus "Solutions" serves to ensure the most favorable pricing while delivering in-depth domain experience. NetSol currently has locations in Bangkok, Beijing, Lahore, London, the San Francisco Bay Area, and Sydney to best serve its clients and partners worldwide. This provides NetSol customers with the optimum balance of subject matter expertise, in-depth domain experience, and cost effective labor, all merged into a scalable solution. In this way, "BestShoring delivers BestSolutionTM".
Information technology services are valuable only if they fulfill the business strategy and project objectives set forth by the customer. NetSol's expert consultants have the technical knowledge and business experience to ensure the optimization of the development process in alignment with basic business principles. The Company offers a broad array of professional services to clients in the global commercial markets and specializes in the application of advanced and complex IT enterprise solutions to achieve its customers' strategic objectives. Its service offerings include IT Consulting & Services; NetSol Defense Division; Business Intelligence, Information Security, Outsourcing Services and Software Process Improvement Consulting; maintenance and support of existing systems; and, project management.
In addition to NetSol Global Business Services, our product offerings are centered around the NetSol Financial Suite ("NSF") of products and components. The NetSol Financial Suite includes our flagship global solution, LeaseSoft. LeaseSoft, a robust suite of four software applications, is an end-to-end solution for the lease and finance industry covering the complete leasing and finance cycle starting from quotation origination through end of contract. The four software applications under LeaseSoft have been designed and developed for a highly flexible setting and are capable of dealing with multinational, multi-company, multi-asset, multi-lingual, multi-distributor, multi-manufacturer, and multi-taxation environments. Each application is a complete solution in itself and can be used independently to address specific sub-domains of the leasing/financing cycle. When used together, they fully automate the entire leasing / financing cycle. LeaseSoft is a result of more than eight years of effort resulting in an industry leading and awarding winning product Applications. NetSol recently added LeaseSoft Fleet Management System (FMS). The Company has already signed an agreement for FMS with a major automotive company in the Asia Pacific region. As with our service offerings, LeaseSoft is complementary to and can be used with all of our regionally developed solutions such as LeasePak in North America and LeaseSoft Asset in Europe.
Beyond LeaseSoft, the NetSol Financial Suite also includes LeasePak. LeasePak provides the leasing technology industry with the development of Web-enabled and Web-based tools to deliver superior customer service, reduce operating costs, streamline the lease management lifecycle, and support collaboration with origination channel and asset partners. LeasePak can be configured to run on HP-UX, SUN/Solaris or Linux, as well as for Oracle and Sybase users. In terms of scalability, NetSol Technologies North America offers the basic product as well as a collection of highly specialized add on modules for systems, portfolios and accrual methods for virtually all sizes and complexities of operations. These solutions provide the equipment and vehicle leasing infrastructure at leading Fortune 500 banks and manufacturers, as well as for some of the industry's leading independent lessors.
Our product and services offerings include: inBanking, which provides full process automation and decision support in the front, middle and back offices of treasury and capital markets operations; LeaseSoft Portals and Modules through our European operations; LeasePak 6.0b of our LeasePak product suite; enterprise wide information systems, such as or LRMIS, MTMIS and Hospital Management Systems; Accounting Outsourcing Services, and, the NetSol Technology Institute, our specialized career and technology program.
To further bolster NetSol's Solutions capabilities, in October 2008, NetSol
acquired Ciena Solutions, a preferred SAP and Business Objects integration firm.
The Ciena Solutions practice is now integrated into our wholly owned subsidiary
NetSol Technologies North America, Inc. This acquisition expands NetSol's domain
and subject matter expertise to include integration and consulting services for:
· SAP R/3 System deployments
· NetWeaver
· Exchange Infrastructure Portals
· MySAP Business Suite
· Supplier Relationship Management Module
· Client Relationship Management Module
· SAP/Business Objects Products and related Services
In additional to this expansion of SAP-centric integration consulting and Services, this practice has developed proprietary intellectual property in the form of designs and source code focused on enhancing SAP-centric procurement activities.
Business successes continued through March 31, 2009 include:
?The execution of a new license contract with a leading Australian leasing
company
?Won another information security contract with a leading cellular company in
Pakistan
?Sold the Hospital Management Suite to Maroof Hospital - Pakistan
?Toyota Motor Finance China went live with NetSol Financial Suite
?Independent Software Review project executed for BMW Japan
?Signed off on a hosting agreement with Rackspace for NTNA
?Signed off a NetSol Financial Suite sale with a major global Japanese automaker
for the Mexican market
?Enhanced maintenance and customization revenue with existing North American
customers
?Signed off with an Africa based business partner to sell Evolve and the NetSol
Financial Suite offering
PLAN OF OPERATIONS
Management undertook major steps to counter the deep effect of global recession, such as:
o Reduced headcount by 140 employees in all three key locations in Pakistan, the United Kingdom and the US. Almost 90% of downsizing took place in Pakistan and in the United Kingdom. The Company's total headcount is approximately 750 people.
o Senior management compensation, benefits and perquisites were reduced by an average of 20% across the Company, while the CEO and Chairman voluntarily cut his compensation by 33%.
o Earlier this year, the senior management had voluntarily forfeited approximately $400,000 of earned cash bonuses. In addition, senior officers agreed to the cancellation of option grants awarded by the Board in 2008 to further reduce the expense.
o To achieve further cost rationalization and improve operating efficiencies the geographic operating areas were realigned globally. Two new areas were created by merging NTE with NTNA and named Region 1. All remaining markets of Asia Pacific, the Middle East and Southeast Asia remain in Region 2.
o By combining both European operations with the US, we expect further streamlining of the cost base as well as optimum utilization of NetSol Center of Excellence, CMMi Level 5 technology campus.
o Revamped sales organization from several departments into one group. The newly created global sales organization under one global sales director, centrally headquartered in the UK, would provide much improved visibility and traction in all key markets worldwide.
o In wake of this deep recession, Region 1, headquartered in Emeryville, California, has aggressively begun the process of either renegotiating the rental costs and/or subleasing a portion of the space. Management believes that the net effect of cost rationalization in operating expenses and general and administrative overheads will be fully reflected from the fourth quarter of fiscal year 2009.
o Some marketing and new projects activities had to be slowed down due to the poor economy but the most strategic new products development and research and development activities has increased. Management's vision is that a one product global solution is the key initiative that will place NetSol in the next level of critical mass solutions providers.
Business Development Activities:
· NetSol launched a long term strategy in 2008 to get NetSol brand and name recognition in UAE and GCC States by a dual listing on DIFX (now NASDAQ DUBAI, exchange). A major breakthrough in this strategy was achieved when a joint venture agreement was reached with a very well established Kingdom of Saudi Arabia (KSA) based business conglomerate. NetSol Technologies, Inc., forged a majority owned joint venture with Atheeb Group of the Kingdom of Saudi Arabia ("KSA"). NetSol owns 51% and Atheeb owns 49% of the newly created Atheeb NetSol, Ltd. entity to be based in Riyadh, Saudi Arabia. Atheeb has been in operation since 1985 and has major businesses in defense, public works, telecom, financial, transportation and agriculture. By partnering with Ahteeb through a joint venture NetSol has access to not only major local projects in key sectors but also in regional economies in GCC states, Central Asia and Africa. The influence and reputation of Atheeb in the KSA and regional markets is compelling and NetSol expects to benefit handsomely in coming years. The joint venture will fully utilize NetSol PK's Lahore based center of excellence, CMMi Level 5 technology campus.
· NetSol has been actively pursuing another joint venture with a major commercial business group in Latin America. The objective is to diversify and expand NetSol software programming and delivery capabilities in emerging economies of Latin America. This initiative has been slated to provide a second delivery location to support NetSol Americas existing and new customers under the Bestshoring™ model. Upon successfully reaching a majority owned joint venture with this group in Latin America, NetSol will be able to leverage cost arbitrage and local presence in a stable region.
· The acquisition of Ciena Solutions or SAP services has been effectively integrated with NetSol's operation. Our new SAP services and offerings are being marketed to our existing US based clients and new markets to establish a key new vertical.
· By expanding into the Americas, NetSol sees a strong opportunity to establish its brand recognition and create critical mass in the Americas. Despite the recession and consolidations in the U.S., NetSol has embarked on an aggressive strategy to reposition and rebrand NetSol for the U.S markets. For example NetSol is strategically rolling out offerings of the NetSol Financial Suite to our global auto manufacturers, whether captive or non-captive, in the North and South American markets. NetSol sees a new market in Mexico, Brazil, Costa Rica and many countries in Latin America as mature and emerging as well as ripe for its flagship LeaseSoft applications and NFS.
· Management envisions a major growth in the Chinese market as it continues to have the strongest economic indicators amongst the major industrial countries. We are expanding the Beijing office and adding local staff. Our current five multi-national customers in China have begun to expand their relationship with NetSol. Management anticipates a break through with Chinese companies for NetSol Financial Suite in coming months.
· The European economy has shown serious decline and the severe impact of consolidation and budget cuts have started to intensely affect our business there. The European markets are expected to remain sluggish and we will hold off any further investment until next year.
Top Line Growth through Investment in organic marketing activities. NetSol marketing activities will continue to:
· Build and expand in North America market by hiring experienced talent that has come available due to recession.
· Diversify in new verticals of services in North America such as healthcare, SAP consulting and public sectors.
· Enhanced sales activities to revive momentum and pipeline of NetSol Financial Suite in APAC, Europe and in the Americas.
· Further extending services offerings to existing 30 plus US customers.
· Penetrate into the Chinese market by growing infrastructure and staff.
· Optimize Lahore center of excellence in emerging and growing markets in Middle East.
· Further penetrate the Australian market in captive and non-captive sectors.
· Accelerate and grow new business through joint ventures and alliances.
Funding and Investor Relations:
· Launch a new IR/PR marketing campaign in the US market after the fiscal year 2009 results.
· Reach out to new small cap funds, sell side analysts and institutions.
· Present 2-3 major investors conferences in summer and fall 2009.
· Improve cash internally through option exercises and employee stock purchase plans.
· Enhance and streamline collections from customers to further improve capital.
· Upon regaining profitability in NetSol PK, explore possibilities of monetizing the currency in PK while maintaining majority position at minimum.
· Seeking the participation of strategic value added business partners, such as joint venture partners, to invest in the Company and support their long term relationship with the Company.
Improving the Bottom Line:
· Continue consolidation and reevaluating operating margins as an ongoing activity.
· Streamline further cost of goods sold to improve gross margins to historical levels over 50%, as sales ramp up.
· Generate much higher revenues per developer and service group, enhance productivity and lower cost per employee overall.
· Consolidate subsidiaries and integrate and combine entities to reduce overheads and employ economies of scale.
· Grow process automation and leverage the best practices of CMMi level 5.
· Cost efficient management of every operation and continue further consolidation to improve bottom line.
· Realignment of business units and restructuring of subsidiaries to improve both operating and net margins.
· Reduced General & Administrative expense and expenses of marketing programs.
Management continues to be focused on building its delivery capability and has achieved key milestones in that respect. Key projects are being delivered on time and on budget, quality initiatives are succeeding, especially in maturing internal processes.
In a quest to continuously improve its quality standards, NetSol is frequently assessed by Carnegie Mellon University to maintain its CMMi Level 5 quality certification. We believe that the CMMi standards achievement is a key reason in NetSol's demand surge worldwide. We remain convinced that this trend will continue for all NetSol offerings promoting further beneficial alliances and increasing the number and quality of our global customers. The quest for quality standards is a key to NetSol overall sustainability and success. In 2008 NetSol became ISO 27001 certified, a global standard and a set of best practices for Information Security Management.
MATERIAL TRENDS AFFECTING NETSOL
Management has identified the following material trends affecting NetSol
Positive trends:
· The global recession and consolidations has opened doors for low cost solution providers such as NetSol.
· The global economic pressures and recession has shifted IT processes and technology to utilize both offshore and onshore solutions providers, to control the costs and improve ROIs.
· New trends in the most emerging and newest markets. There has been a noticeable new demand of leasing and financing solutions as a result of new buying habits and patterns in the Middle East, Eastern Europe and Central America.
· Access to excellent talent at affordable salaries globally with much reduced turnover.
· The surge of joint ventures in emerging markets is growing and is beneficial to both parties, representing strengths with core competencies without any overlap. Thus mitigating the risk of starting fresh in untested territories with modest investments.
· Global opportunities to diversify delivery capabilities in new emerging economies that offer geopolitical stability and low cost IT resources reducing dependency upon Lahore technology campus.
· Positive growth and resiliency indicators of domestic economy in Pakistan, primarily a cash based economy, and not dependent on credit markets leading to renewed optimism for growth in local public and private sectors.
· Continued momentum in defense sectors in Pakistan due to geopolitical challenges facing Pakistan. NetSol has partnership with a major international defense contractor to bid in Pakistan.
· Our global multi-national clients have continued to pursue deeper relationship in newer regions and countries. This reflects our customers' dependencies and satisfaction with our NetSol Financial Suite.
· The levy of Indian IT sector excise tax of 35% (NASSCOM) on software exports is very positive for NetSol. In Pakistan there is a 15 year tax holiday on IT exports of services. There are 7 more years remaining on this tax incentive.
· Cost arbitrage, labor costs still very competitive and attractive when compared with India. Pakistan is significantly under priced for IT services and programmers as compared to India.
· Latest comments by the Federal Reserve on anticipated upturn in economy by year end 2009.
Negative trends:
· Dramatic and deep global recession has created a serious decline in business spending causing deep budget cuts for many of the Company's target verticals.
· Tightened liquidity and credit restrictions in consumer spending has either delayed or reduced spending on business solutions and systems.
· Corporate earnings losses and liquidity crunch causing delays in the receivables from few clients.
· Seriously troubled US auto sectors, banking and retail sectors, thus elongating both the sales and closing cycles.
· Domestic political and extremism challenges facing Pakistan, has reduced foreign travels and foreign direct investment or FDI.
· An economic turnaround may take 1-2 years worldwide.
CRITICAL ACCOUNTING POLICIES
Our financial statements and related public financial information are based on the application of accounting principles generally accepted in the United States ("GAAP"). GAAP requires the use of estimates; assumptions, judgments and subjective interpretations of accounting principles that have an impact on the assets, liabilities, and expense amounts reported. These estimates can also affect supplemental information contained in the external disclosures of NetSol including information regarding contingencies, risk and financial condition. Management believes our use of estimates and underlying accounting assumptions adhere to GAAP and are consistently and conservatively applied. Valuations based on estimates are reviewed for reasonableness and conservatism on a consistent basis throughout NetSol. Primary areas where our financial information is subject to the use of estimates, assumptions and the application of judgment include our evaluation of impairments of intangible assets, and the recoverability of deferred tax assets, which must be assessed as to whether these assets are likely to be recovered by us through future operations. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions or conditions. We continue to monitor significant estimates made during the preparation of our financial statements.
REVENUE RECOGNITION:
The Company recognizes its revenue in accordance with the Securities and Exchange Commissions ("SEC") Staff Accounting Bulletin No. 104, "Revenue Recognition" ("SAB 104") and The American Institute of Certified Public Accountants ("AICPA") Statement of Position ("SOP") 97-2, "Software Revenue Recognition," as amended by SOP 98-4 and SOP 98-9, SOP 81-1, "Accounting for Performance of Construction-Type and Certain Production-Type Contracts," and Accounting Research Bulletin 45 (ARB 45) "Long-Term Construction Type Contracts." The Company's revenue recognition policy is as follows:
License Revenue: The Company recognizes revenue from license contracts without major customization when a non-cancelable, non-contingent license agreement has been signed, delivery of the software has occurred, the fee is fixed or determinable, and collectability is probable. Revenue from the sale of licenses with major customization, modification, and development is recognized on a percentage of completion method, in conformity with ARB 45 and SOP 81-1. Revenue from the implementation of software is recognized on a percentage of completion method, in conformity with Accounting Research Bulletin ("ARB") No. 45 and SOP 81-1. Any revenues from software arrangements with multiple elements are allocated to each element of the arrangement based on the relative fair values using specific objective evidence as defined in the SOPs. An output measure of "Unit of Work Completed" is used to determine the percentage of completion which measures the results achieved at a specific date. Units completed are certified by the Project Manager and EVP IT/ Operations.
Services Revenue: Revenue from consulting services is recognized as the services are performed for time-and-materials contracts. Revenue from training and development services is recognized as the services are performed. Revenue from maintenance agreements is recognized ratably over the term of the maintenance agreement, which in most instances is one year.
Unearned Revenue: Unearned Revenue is broken down into three main categories; a) annual maintenance contracts whereby the annual fee is collected at the beginning of the service period and recognized on a pro-rata basis over the life of the contract, b) service revenue connected to those contracts which the implementation and development segments are recognized on the percentage of completed method; and c) customized development projects for existing customers to modify their version of the product to better meet their individual needs which are recognized on the percentage of completion method.
VALUATION OF LONG-LIVED AND INTANGIBLE ASSETS
The recoverability of these assets requires considerable judgment and is evaluated on an annual basis or more frequently if events or circumstances indicate that the assets may be impaired. As it relates to definite life intangible assets, we apply the impairment rules as required by SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and Assets to Be Disposed Of" which requires significant judgment and assumptions related to the expected future cash flows attributable to the intangible asset. The impact of modifying any of these assumptions can have a significant impact on the estimate of fair value and, thus, the recoverability of the asset.
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