It's NetSol Technologies' Time to Shine

After almost two years of watching NetSol Technologies (NTWK), I made my first buy Friday afternoon. NetSol is an IT company based primarily in Pakistan but with operations in UK and North America as well. It specializes in systems integration and software for automobile lease management, and increasingly on e-government initiatives for the Pakistani national government and the Punjab regional government. NetSol also does some general outsourcing.

Friday, NetSol announced quarterly results for NetSol PK, the largest component of the NetSol's largest Asia Pacific division. NetSol PK reported revenues of $3.7 million and earnings that will contribute $.04/share. The improvement in year-over-year metrics is stunning: revenues are up 129%, gross profits are up 201%, and net profit margins grew from 9.6% to 41.7%.

NetSol PK Chairman and CEO Salim Ghauri said:

"We are experiencing strong growth in the Pakistan market, as evidenced by several important projects initiated with both the federal and Punjab governments. NetSol PK expects the present growth pattern to continue for the next two quarters, as the Company capitalizes on its leadership position in the Information Technology [IT] sector of Pakistan."

Keep in mind that NetSol PK is only part of NetSol Technologies, albeit the largest part. The Asia Pacific division (represented by the blue wedge in the pie chart to the left) accounted for 55% of revenues in fiscal 2006, and I estimate that NetSol PK was responsible for perhaps 75-80% of that.

The other NetSol companies are smaller, but still valuable. Last year NetSol UK rang up about $2 million in revenues and contributed around 3 cents per share in profits. TiG NetSol, a London-based outsourcing joint venture that is 51% owned by NetSol had revenues of $1.6 million and was good for maybe 2.5 cents per share after adjusting for the minority interest. NetSol Connect (pvt), a Pakistani ISP in which NetSol is the majority owner, contributed almost $900k in revenues and was negligibly profitable. NetSol CQ, another lease software company acquired by NetSol in 2006, accounted for 25% of revenues and was also profitable.

I liked NetSol enough based on current operations to buy it today, but there is a catalyst that could lead to much higher growth in the coming three years. NetSol is one of four finalists for a $300 million project to automate the land record systems for the Punjab region. The government has stated that two of the four finalists will be selected as final vendors for the project in the second half of 2007. NetSol has won projects in the past from the Punjab regional government, which could give it a leg up.

Bottom line: NetSol is compelling without the Punjab land automation contract, but could be a huge winner if it lands the bid. There is some overhang from a recent share registration, and the stock trades heavily. Improving fundamentals should trump a less-than-inspiring technical setup, and I think that happens sooner rather than later.

Disclosure: Author owns shares of NTWK.

Comments

[paul_ny]

2007 Financial Results
CALABASAS, CA -- (MARKET WIRE) -- 02/12/07 --
NetSol Technologies Inc. ("NetSol") (NASDAQ: NTWK), a multinational provider
of enterprise software and IT services to the financial services industry,
today announced financial results for the second quarter of fiscal year 2007,
ending December 31, 2006.
Second Quarter FY 2007 Consolidated Financial Highlights
-- Revenues increased 60% to $7.2 million
-- Operating income rose 36% to $375 thousand
-- GAAP EPS was ($0.27) due to one-time, non-cash charge of $4.3 million
relating to the financing for the acquisition of McCue Systems
-- EBITDA was $527 thousand, or $0.03 per basic and diluted share,
excluding the one-time non-cash charge
-- Pro forma EPS was ($0.02) per basic and diluted share, excluding the
one-time non-cash charge

NetSol Technologies, Inc. reported consolidated revenues of $7.2 millionfor
the second quarter of fiscal year 2007, a 60% increase compared to the $4.5
million in revenues reported for the same period in fiscal year 2006.
Consolidated gross profit for the second quarter was approximately $3.6
million, or 50%.
Net loss for the second quarter of fiscal year 2007 was approximately $4.6
million, or a loss of $0.27 per basic and diluted earnings per share,
whichcompares to net income of $125 thousand, or $0.01 per basic and diluted
earnings per share, reported in the second quarter of fiscal year 2006. The
Company recorded a one-time, non-cash charge of $4.3 million relating to the
financing for the acquisition of McCue Systems in June 2006. Excluding this
one-time charge, NetSol would have reported EBITDA of $527 thousand, or $0.03
per basic and diluted share, and a net loss of $375 thousand, or a loss of
$0.02 per basic and diluted share, for the second quarter of fiscal 2007.
Najeeb Ghauri, chairman and CEO, commented, "NetSol recorded strong
revenuegrowth in the second quarter of fiscal 2007, driven by our ability to
closecontracts in the Asia Pacific and European markets. We also continued to
make progress in the North American market, as the integration of McCue Systems
proceeds according to plan. In addition, we are seeing strong growth in the
Pakistan market, as evidenced by several, important non-traditional NetSol
projects initiated with both the federal and Punjab governments.
"Our second quarter results also reflect a one-time, non-cash charge relating
to the acquisition of McCue Systems in June 2006. With this charge, all costs
relating to that acquisition are expensed and behind us, so we may now move
forward aggressively in the North American market. We expect to have that
division substantially integrated into the NetSol organization and leveraging
our superior offshore capabilities by the end of this fiscal year."
Mr. Ghauri concluded, "Historically, NetSol posts its strongest results in the
second half of the fiscal year. Our pipeline of orders for commercial finance
products, particularly in the Chinese market and in Europe, indicate that this
trend will continue. Moreover, our pipeline of business in Pakistan is
stronger than ever. As a result, we continue to believe we can deliver
revenues of approximately $30 million and improved operating profitability for
fiscal year 2007."
Second Quarter Business Highlights
Asia-Pacific (APAC) Division
-- Signed two new multi-million dollar contracts for LeaseSoft with
global, blue chip brand names in the Captive Finance sector - one in
Australia, the other in China;
-- Continued to expand pipe line of opportunities in Australia, Thailand,
New Zealand and China; and
-- Expanded client and market reach beyond traditional leasing market
into local Pakistan market;
-- Successful implementation of Motor Transport Management Information
System (or MTMIS) in Lahore, with an additional 28 districts to go live by
the end of calendar year 2007.

Europe/Middle East (EMEA) Division-- Completed major client projects on time
and on budget to deliver
record UK service revenue - one significant project was with Investec Asset
Finance;
-- Introduced new products to support front and middle office operations
of leasing companies, providing end-to-end contract management - three
system implementations are currently scheduled or in progress, with
significant interest generated; and
-- Recorded the first sale of the division's newest software offering,
LeaseSoft Evolve, to broker Kennet Equipment Leasing for the management of
its own equipment leasing portfolio.

North America Division-- Delivered LeasePak 6.0, the largest and most
comprehensive release of
the product to date - receiving excellent customer response and reviews;
-- Initiated rollout of the IT Services line of business to the US
commercial finance technology sector, and
-- Integration of McCue Systems into NetSol Technologies is on track and
progressing well - with continued success in the leveraging of offshore
resources, improved internal resource utilization and effective marketing
efforts.